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 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 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 and 2012 (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.
The Commission is required to draw up a new list every five years. It will determine the next list by the end of 2014, which will apply for the years 2015-2019. The criteria to be used to determine the new list are the same as those used to determine the current list (see below).
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:
A sector or sub-sector is also deemed to be exposed to a significant risk of carbon leakage if:
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.
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.
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.
In view of preparing the carbon leakage list for 2015-2019, the Commission will organise meetings in 2013 to consult stakeholders, including Member States, industry, NGOs and academia. The Commission will determine the next list at the latest by the end of 2014.