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Climate Action

On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.

Under the EU emissions trading system (EU ETS), industrial installations considered to be at 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 receives a higher share of free allowances compared to the other industrial installations.

This policy will continue in phase 4 (2021-2030), but based on more stringent criteria and improved data.

Carbon leakage list

There is an official list of sectors and sub-sectors considered to be at a significant risk of carbon leakage.

The European Commission draws up the list with the agreement of Member States and the European Parliament, following an impact assessment and extensive consultation with stakeholders.

Carbon leakage lists:

  • The first list was applied in 2013-2014. The list was amended in 2011, 2012 and 2013.
  • The second list was applied in 2015-2019. In 2017, it was decided that this list will also be valid for 2020.
  • For phase 4 (2021-2030), a new list was adopted by the Commission in February 2019 and published in May 2019.

Defining significant risk of carbon leakage (for the current list 2015-2020)

In phase 3, a sector or sub-sector is considered to be at 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.

Sectors facing carbon leakage receive higher share of free allocation

In phase 3 of the EU ETS, for each ETS installation, 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.

In phase 4, free allocation will focus on sectors at the highest risk of relocating their production outside of the EU.

The criteria to determine whether a sector or sub-sector is deemed to be exposed to a significant risk of carbon leakage have changed. The level of carbon leakage exposure of sectors is assessed on the basis of an indicator reflecting trade and emissions intensity.

Highly exposed sectors are placed on the carbon leakage list and will receive allowances equivalent to 100% of the relevant benchmark for free.

For less exposed sectors, free allocation will amount to 30% up to 2026 and will be phased out thereafter by 2030.

Financial compensation for indirect emissions

Article 10a(6) of the ETS Directive allows Member States 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.

The possibility for Member States to provide this type of state aid will continue in phase 4, accompanied by enhanced transparency and reporting provisions.

Member States should seek to use no more than 25% of auction revenues for this purpose. If they exceed this amount, they will have to justify doing so.

Member States will also have to regularly publish the amount paid out to beneficiaries of the compensation, both per sector and in total.

The Commission has initiated a revision of the EU ETS state aid guidelines for phase 4.


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Third carbon leakage list (EU ETS Phase 4): Questions and Answers

Second carbon leakage list (EU ETS Phase 3): Questions and Answers (October 2014)