Climate Action

Carbon leakage

Policy

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.

Documentation

Post-2020 carbon leakage provisions

Carbon leakage list 2015-2019

Carbon leakage list 2010-2014

Legal documents

Qualitative assessment of sectors and sub-sectors

Stakeholder consultations

State aid guidelines

Studies

Preparation of the carbon leakage list for 2015-2019

Other studies

FAQ

Carbon leakage: Questions and Answers (October 2014)

Who has been consulted in the process of establishing the first list of sectors deemed to be exposed to a significant risk of carbon leakage?

The competent Commission services have attached much importance to consulting the stakeholders while establishing the first list of carbon leakage sectors, which has been agreed end of 2009. Several stakeholder meetings with industry, NGOs, academics and Member States took place in 2009 in the run-up to producing the list. The meeting documents and reports are available on the website of DG Climate Action.

The stakeholders have been able to provide full input to the process and to express opinions on the analysis that led to the decisions on which sectors to include on the carbon leakage list.

How has the second list which will be applicable from 2015 onwards been established?

Following the Communication on a policy framework for climate and energy in the period from 2020 to 2030, in which it was stated that the existing policy framework for those industrial sectors most at risk of carbon leakage should be maintained until the end of trading in phase 3, the Commission has prepared a new carbon leakage list. The list was adopted on 27 October 2014, and shall be applicable from 2015 to 2019.

For the new Decision, the Commission has carried out the assessment pursuant to Article 10a(15), (16) and (17) of the ETS Directive.

At what level of disaggregation have you performed the carbon leakage assessment?

Regarding the level of disaggregation used in the carbon leakage assessment, a common methodology is essential to provide a fair and consistent approach and retain a level playing field. This was followed in a transparent manner by the Commission.

As a rule, the assessment was performed at NACE 4 level, since this gives the Commission the best information on which to base its decisions, and allow the measures to avoid carbon leakage to be targeted most effectively.

For some sectors or sub-sectors which were not above the specific threshold values defined by the Directive above which sectors are deemed at a significant risk of carbon leakage, the Commission made a more disaggregated analysis, including at a product level. A few of those subsectors/products have also been deemed exposed to a significant risk of carbon leakage.

When will this list be revised?

European co-legislators (Council and European Parliament) decided that the Commission should determine the first list by the end of December 2009, and every five years thereafter. This means that the first list is used for the free allocation of allowances for the years 2013 and 2014. The second carbon leakage list, adopted on 27 October 2014, will be used for the free allocation in the period 2015-2019.

The Commission also may, at its own initiative or at the request of a Member State, every year add a sector or subsector to the list if it can be demonstrated, in an analytical report, that this sector or subsector satisfies the criteria laid down in the directive. This possibility was already used in 2011, when several sectors were added to the first list by Decision 2011/745/EU.

In 2011, 2012 and 2013 the Commission added 14 additional sectors and sub-sectors to the first carbon leakage list.

In addition to the above, the ETS Directive also gives the Commission the right to consider and propose a revision in the light of the outcome of international negotiations, based e.g. on new information on which countries are deemed to have committed to reducing greenhouse gas emissions in the relevant sectors or subsectors to an extent comparable of the Community.

What are the environmental implications of the list?

It is important to bear in mind that the environmental outcome of the ETS is determined by the overall cap. However, the measures, i.e. higher levels of free allocation, are necessary from the environmental standpoint at the global level to avoid carbon leakage.

The EU ambition to reduce emissions by 21% in the ETS sectors remains unchanged and all sectors will have to contribute to the necessary emissions reductions, regardless whether they are on the list of exposed sectors or not. This will be ensured by the following elements:

  • The emissions cap will decline annually to reach a 21% cut in 2020 compared to 2005 and will apply across all sectors.
  • The total free allocation to industry is limited to the share of these industries' emissions in 2005 to 2007 and will decline with the emissions cap.
  • The absolute number of allowances distributed for free, which are to be shared out among the sectors, is determined by ambitious benchmarks based on the average performance of the 10% most efficient installations in a sector.
  • If adding up all the preliminary allocations as calculated based on the benchmarks would lead to an overshooting of the maximum amount, a so called "cross sectoral correction factor" will be applied.

How is it possible that sectors such as manufacture of musical instruments are included on the list?

Although such sectors are not among the activities explicitly mentioned in Annex I of the Directive, some installations in these sectors can be covered by the ETS due to their combustion units. Although they may not be energy-intensive, many qualify on the list of sectors deemed as exposed to a significant risk of carbon leakage due to high trade exposure.

In any case, only installations included in the ETS would receive free allowances, and only an amount corresponding to their relatively low combustion emissions from production of heat up to the level of a benchmark.

What is the reason for a higher level of free allocation of allowances to certain sectors?

The particular treatment will be provided to installations in sectors or sub-sectors that are deemed to be exposed to a significant risk of "carbon leakage" – relocation of production outside the EU – because they face competition from industries in third countries which are not subject to comparable greenhouse gas emissions restrictions. Installations within the mentioned sectors or sub-sectors will receive free allowance allocation up to 100% of the relevant benchmark until 2020, while installations that are not deemed to be exposed to a significant risk of carbon leakage will receive an allowance allocation up to 80% of the relevant benchmark in 2013, falling to 30% in 2020.

It should be noted, that due to the economic crisis and related emissions reductions, most energy intensive sectors covered by the EU ETS have accumulated a significant surplus of free allowances, since allocations were not reduced accordingly. Together with the current low level of carbon prices, the estimated risk of carbon leakage, in case there would be no free allocation to industry, is considerably lower than what was foreseen when the climate and energy package was adopted in 2009.