Under the EU emissions trading system (EU ETS), industrial installations deemed to be exposed to a significant risk of carbon leakage receive special treatment to support their competitiveness.
Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries.
To safeguard the competitiveness of industries covered by the EU ETS, the production from sectors and sub-sectors deemed to be exposed to a significant risk of carbon leakage receive a higher share of free allowances in phase 3 of the EU ETS (2013- 2020), compared to the other industrial installations.
Carbon leakage list
The sectors and sub-sectors deemed to be exposed to a risk of carbon leakage are defined in an official list.
The European Commission draws up the list with the agreement of Member States and the European Parliament and following an impact assessment and extensive consultation with stakeholders.
The first carbon leakage list was applied in 2013 and 2014. The list was amended in 2011, 2012 and 2013.
The second carbon leakage list, which applies for the years 2015-2019, was adopted in October 2014.
Defining significant risk of carbon leakage
According to the ETS Directive (Article 10a), a sector or sub-sector is deemed to be exposed to a significant risk of carbon leakage if:
- direct and indirect costs induced by the implementation of the directive would increase production cost, calculated as a proportion of the gross value added, by at least 5%; and
- the sector's trade intensity with non-EU countries (imports and exports) is above 10%.
A sector or sub-sector is also deemed to be exposed if:
- the sum of direct and indirect additional costs is at least 30%; or
- the non-EU trade intensity is above 30%.
The cost estimate referred to above takes into account that sectors not on the carbon leakage list are also eligible for some free allocation.
Overall, the risk of carbon leakage – without any free allocation to industry – is estimated to be considerably lower than when the 2020 climate and energy package was adopted in 2009. This is because
- due to the economic crisis and related output and emissions reductions, most industrial installations covered by the EU ETS have accumulated a significant surplus of free allowances, and
- the carbon price has declined, reflecting the lower demand for allowances.
Sectors facing carbon leakage receive higher share
For each installation in the EU ETS, the amount of free allocation is calculated based on a formula where its production quantity (in tonnes of product) is multiplied with the benchmark value for that particular product (measured in emissions per tonne of product).
Installations in sectors exposed to a significant risk of carbon leakage in principle are eligible to receive free allocation at 100% of this quantity. For installations in other sectors, not on the carbon leakage list, the free allocation is gradually reduced across phase 3 (80% in 2013, reducing every year to reach 30% in 2020).
Since the benchmarks are based on the performance of the most efficient installations, only the most efficient installations in each sector receive enough free allowances to cover all their needs.
Financial compensation for indirect emissions
Article 10a(6) of the revised ETS Directive gives Member States the possibility to compensate the most electro-intensive sectors for increases in electricity costs as a result of the EU ETS, through national state aid schemes.
The European Commission has published guidelines to ensure that such measures are in line with EU state aid rules. The Commission must approve the national schemes before any aid can be granted.
Carbon leakage measures after 2020
As part of the 2030 climate and energy policy framework, EU leaders decided to continue the free allocation of emission allowances until 2030.