The term ‘carbon leakage’ refers to the transfer of CO2 emissions from one country to another when, due to strict climate policies, companies relocate their production to countries with weaker emission constraints. This can contribute to an increase in global greenhouse gas emissions.
Under the EU ETS, installations and operators considered to be at risk of carbon leakage receive some free emission allowances. Free allocation rules have been adapted over time, based on more stringent criteria and improved data.
The risk of carbon leakage may be higher in certain energy-intensive industries. This is why installations and operators belonging to these sectors and sub-sectors receive a higher share of free allowances compared to other industries.
Carbon leakage list
The European Commission works closely with Member States and the European Parliament to create lists that identify industries at high risk of carbon leakage. This process involves impact assessments and extensive consultations with stakeholders.
The list for the 2021-30 period identifies 63 sectors and sub-sectors, covering about 94% of industrial emissions under the scope of the EU ETS.
Previous carbon leakage lists are available in the Documentation section below.
Defining risk of carbon leakage
Industries’ exposure to carbon leakage is assessed based on two key criteria, trade and emissions intensity, as follows
- If trade intensity multiplied by emissions intensity is above 0.2, the sector is considered at a significant risk of carbon leakage.
- If trade intensity multiplied by emissions intensity is above 0.15 but below 0.2, a qualitative assessment is conducted. This takes into account the sector’s potential for reducing emissions, as well as market characteristics and profit margins.
Trade intensity is calculated using the following formula: (imports + exports) / (imports + production)
Emissions intensity is calculated using the following formula: [direct emissions + (electricity consumption x electricity emission factor)] / gross value added
Free allocation
Free allocation to specific sectors is determined by performance benchmarks, which reflect the average emissions intensity per unit of product from the 10% most efficient installations within each sector.
The volume of free allowances allocated to an installation is calculated based on a formula that multiplies its production quantity (in tonnes of product) by the benchmark value for that specific product (measured in emissions per tonne of product).
As these benchmarks are based on the performance of the 10% most efficient installations in each sector, only the most efficient installations will receive enough free allowances to cover their needs.
Based on this calculation, installations in sectors facing a high risk of carbon leakage are generally eligible to be allocated 100% of their allowances for free. However, for less exposed sectors not indicated on the carbon leakage list, free allocation will amount to 30% up to 2026 and will be gradually phased out by 2030.
Compensation of indirect carbon costs
When power plants pass on the cost of ETS allowances to governments, Member States can grant state aid to help certain energy-intensive industries cope with rising electricity costs. Currently, around half of the Member States are offering this form of aid to support their industries.
To ensure the consistent implementation of such aid across Member States and minimise internal market distortions, the Commission introduced the EU ETS State aid guidelines.
Initially covering indirect costs incurred between 2013 and 2020, these guidelines were revised in 2020 to cover the 2021-2030 period. National compensation schemes must be approved by the Commission before any aid can be granted.
Member States providing state aid to address indirect carbon costs are subject to transparency and reporting requirements. They are required to publish the amount of state aid provided, both per sector and in total, on an annual basis. To prevent excessive reliance on ETS revenues for this type of state aid, Member States should limit their state aid expenditure to no more than 25% of their ETS revenues. If they exceed this threshold, they are required to submit a report explaining their motivations.
- 2021-30 - Third carbon leakage list.
- 2015-19 - Second carbon leakage list (in 2017, it was decided that this list would also be valid for 2020).
- 2013-14 - First carbon leakage list (the list was amended in 2011, 2012, and 2013).