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According to the EU legislation (Article 10a of the revised Directive), 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 this directive would lead to a substantial increase of production cost, calculated as a proportion of the Gross Value Added, of at least 5%; and
• the Non-EU Trade intensity defined as the ratio between total of value of exports to non EU + value of imports from non-EU and the total market size for the Community (annual turnover plus total imports) 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 induced by the implementation of this directive would lead to a particularly high increase of production cost, calculated as a proportion of the Gross Value Added, of at least 30%; or
• if the Non-EU Trade intensity defined as the ratio between total of value of exports to non EU + value of imports from non-EU and the total market size for the Community (annual turnover plus total imports) is above 30%.

The resulting list may be supplemented after completion of a qualitative assessment, taking into account additional criteria referred to in article 10a.

According to the Directive, production from sectors deemed to be exposed to a significant risk of carbon leakage will receive relatively more free allowances than other sectors. Free allowances will in principle be allocated based on product-specific benchmarks for each relevant product. The starting point for the benchmarks is the average of the 10% most efficient installations, in terms of greenhouse gases, in a sector and they shall take into account the most efficient techniques, substitutes and alternative production processes.

The benchmarks will be multiplied by a historical production figure, and some other factors that are needed to ensure the respect of the annually declining total cap.

The only concrete effect of the list of sectors exposed to a significant risk of carbon leakage is that for the sectors mentioned on the list, the free allocation will be multiplied by a factor 1 (100%) while for other sectors the allocation will be multiplied by a lower figure (0,80 in 2013, and reduced every year to reach 0.30 in 2020). It does thus not mean that the exposed sectors are exempted from the ETS. Furthermore, given that the benchmarks will be stringent, only the most efficient installations have any chance of receiving all of its needed allowances for free.

It should be stressed that the free allowances will be product-based, not sector-based. All products of the same kind should get an equal treatment in terms of carbon leakage. All relevant products will be classified as exposed to carbon leakage or not, based on the list of sectors. Therefore, it is not because an installation mainly produces products exposed to a significant risk of carbon leakage that all products produced in such an installation will receive a favourable carbon leakage treatment.

Analytical report in light of the outcome of the international negotiations

The revised Directive also recognises that the competitive situation, and thus the risk of carbon leakage, may change in case there is an international climate change agreement. Therefore, its Article 10b stipulates that:

"By 30 June 2010, the Commission shall, in the light of the outcome of the international negotiations and the extent to which these lead to global greenhouse gas emission reductions, and after consulting with all relevant social partners, submit to the European Parliament and to the Council an analytical report assessing the situation with regard to energy-intensive sectors or sub-sectors that have been determined to be exposed to significant risks of carbon leakage. This shall be accompanied by any appropriate proposals."

The Commission first consulted the stakeholders on the analytical report and its preliminary conclusions at an ad-hoc meeting of the European Climate Change Programme (ECCP) working group on emissions trading on 17 March 2010. Following the meeting, the Commission sent the stakeholders a set of consultation questions, inviting them to comment on this issue and on related issues, in order to allow all relevant stakeholders, including EU industry associations, trade unions, environmental NGOs and Member States, to effectively contribute to the report. Responses from stakeholders others than those directly invited to provide comments were taken into consideration as well.

Possibility of financial compensation for indirect emissions

The revised Directive, Article 10a6 also provides for the possibility for Member States to compensate the most electro-intensive sectors for increases in electricity costs resulting from the ETS through national state aid schemes. Therefore, the Commission will correspondingly modify the Environmental State Aid Guidelines. The adoption of the new rules is foreseen for 2011.

Main steps

Step	Date
Data collection and analysis Bilateral stakeholder consultations with Member States, industry sectors and NGOs	winter-spring 2009
Stakeholder consultation (only for invited stakeholders)	30 March 2009
Stakeholder consultation (only for invited stakeholders)	29 April 2009
Preliminary results of the quantitative analysis and qualitative analysis (not for sectors passing the quantitative criteria)	April-June 2009
Draft list of exposed sectors or sub-sectors	June 2009
Stakeholder consultation (only for invited stakeholders)	1 July 2009
Draft decision to Member States (Climate change committee)	September 2009
Three months scrutiny by the European Parliament	September-December 2009
Adoption by the Commission	24 December 2009
Analytical report in light of the outcome of international negotiations	By 30 June 2010

Stakeholder consultations

In 2008 and 2009, the Commission held five stakeholder meetings on the subject of carbon leakage in which the stakeholders (Member States, industry, NGOs and academics) were given the opportunity to present their views. The consultations took place in the framework of the Working Group on the review of the EU emissions trading scheme (EU ETS), set up in the context of the European Climate Change Programme (ECCP).

Presentations (1st July 2009)

The presentations and the table below outline the approach and draft results of the quantitative analysis on carbon leakage made by the Commission services. The table contains data on estimated cost increases in relation to gross value added due to the implementation of the Directive and trade intensity in the form of imports and exports divided by the total market (annual turnover plus imports). The data covers all sectors that are potentially covered by the ETS.

The criteria to determine the exposed sectors are spelled out in Article 10a of the ETS Directive (2009/29/EC) and are as follows: A sector or sub-sector is deemed to be at a significant risk of carbon leakage if there is a cost increase exceeding 5% of its gross value added and the trade intensity exceeds 10%, or if one of the two criteria exceeds 30%. Based on the figures in the table, it can thus be estimated which sectors may be considered as exposed to a risk of carbon leakage.

Please note that the presentations and the table reflected the work of DG Enterprise and DG Environment, before the Commission interservice consultation and the political process.