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Carbon leakage

To address the competitiveness of industries covered by the EU emissions trading system (EU ETS), production from sectors and sub-sectors deemed to be exposed to a significant risk of 'carbon leakage' will receive a higher share of free allowances in the third trading period between 2013 and 2020. This is because they face competition from industries in third countries which are not subject to comparable greenhouse gas emissions restrictions.


Carbon leakage

Carbon leakage is the term often used to describe the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries which have laxer constraints on greenhouse gas emissions. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries.

The sectors and sub-sectors which are deemed to be exposed to a significant risk of carbon leakage are those that figure in an official list which is valid for five years. This is established by the European Commission after agreement by the Member States and the European Parliament (through the so-called Comitology procedure) and following extensive consultation with stakeholders.

The Commission is required to draw up a new carbon leakage list every five years. The second carbon leakage list, which will apply for the years 2015-2019, was adopted in October 2014. The criteria used to determine the new list are the same as those used to determine the first list.

The first carbon leakage list was adopted by the Commission at the end of 2009 and is applicable for the free allocation of allowances in 2013 and 2014. The list was amended in 2011, 2012 and 2013 (see Documentation tab above). Amendments are allowed for by the Directive following completion of quantitative and qualitative assessments of further sectors and sub-sectors according to the criteria referred to in Article 10a of the revised ETS Directive.

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:

  • the extent to which the sum of direct and indirect additional costs induced by the implementation of the directive would lead to an increase of production cost, calculated as a proportion of the Gross Value Added, of at least 5%; and
  • the trade intensity (imports and exports) of the sector with countries outside the EU is above 10%.

A sector or sub-sector is also deemed to be exposed to a significant risk of carbon leakage if:

  • the sum of direct and indirect additional costs is at least 30%; or
  • the non-EU trade intensity is above 30%.

The cost estimation referred to above takes account of the fact that sectors which are not on the carbon leakage list are also eligible for some free allocation, though to a lesser extent than those on the list.

Due to the economic crisis and related output and emissions reductions, most energy intensive sectors covered by the EU ETS have accumulated a significant surplus of free allowances. In addition, the carbon price has declined to reflect the reduced demand for allowances. These factors mean that the risk of carbon leakage - in the absence of any free allocation to industry – is estimated to be considerably lower than when the climate and energy package was adopted in 2009.

Product-based benchmarks

Free allowances are in principle allocated on the basis of product-specific benchmarks for each relevant product. The benchmarks are multiplied by a historical production figure and some other factors that are needed to ensure the respect of the annually decreasing total cap on ETS allowances.

For the sectors and sub-sectors included in the list, the free allocation is multiplied by a factor of 1 (100%) while for other sectors the allocation will be multiplied by a lower figure (80% in 2013, reducing every year to reach 30% in 2020). The "exposed" sectors are thus not exempted from the ETS. Furthermore, given that the benchmarks are based on the most efficient installations, only the most efficient installations in each sector receive for free an amount of allowances that may cover all their needs.

All relevant products are classified as exposed to carbon leakage or not. This classification is set out in an annex to the Commission decision determining the harmonised allocation rules, based on the most recent carbon leakage list. The annex is kept updated.

Possibility of 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 resulting from the ETS through national state aid schemes. The Commission has published guidelines to ensure that such measures are undertaken in conformity with the EU's state aid rules. The national state aid schemes will have to be approved by the Commission before any aid may be granted.

Adoption of the second list for 2015-2019

The second carbon leakage list for 2015-19 was adopted by the Commission on 27 October 2014, and will be applied to free allocation for the first time in 2015.

In view of preparing the carbon leakage list for 2015-2019, the Commission organised meetings in 2013 to consult stakeholders, including Member States, industry, NGOs and academia.

The draft proposal for the new list was published on 5 May 2014. The Climate Change Committee voted favorably on the draft list on 9 July, which was followed by the compulsory three-months' scrutiny the European Parliament and the Council.

Planning for phase 4 of the EU ETS

The Commission has launched in May 2014 a public consultation to canvass opinions on different options for a system to avoid carbon leakage after 2020. The consultation focused on how many allowances should be dedicated to addressing the risk of carbon leakage post-2020 and what respective roles free allocation and support for industrial innovation should play.

Based on a questionnaire, the consultation was open until 31 July 2014 and complemented three stakeholder meetings being held on 13 June, 10 July and 25 September 2014. The meetings have been web-streamed, and are still available online.