Environment and Energy

EU Rules on carbon leakage misunderstood

[FIRST PUBLISHED IN THE AUSTRALIAN FINANCIAL REVIEW 9 OCTOBER 2009)

The European Union is a leader in addressing climate change and is committed to securing a successful outcome at Copenhagen . The EU emissions trading scheme (EU ETS) has been operating since 2005 and involves over 10 000 installations in the 27 member states, as well as Norway, Iceland and Lichtenstein. It is a crucial tool in achieving our emissions reduction targets, now and into the future.

The issue of 'carbon leakage' relates to the risk that companies in sectors subject to strong international competition might relocate to third countries with less stringent constraints on greenhouse gas emissions.

On Friday 18 of September, EU Member States approved a draft Decision listing 164 industrial sectors and sub-sectors deemed to be exposed to carbon leakage. Under the revised EU ETS, which will apply from 2013, installations in such sectors are not by any means exempted from the ETS, but they will receive a higher share of greenhouse gas emission allowances free of charge than other industrial sectors. The final Decision should be adopted by the European Commission by the end of the year, following scrutiny by the European Parliament and the Council.

The EU's ambition level, in terms of emissions reductions in the ETS sectors, remains unchanged and all sectors will have to contribute to the necessary emissions reductions, regardless of whether they are on the list of exposed sectors or not.

Auctioning will be the principle method of allocation of greenhouse gas allowances for the future, and with this in mind, we believe the EU's adopted rules around carbon leakage have been in part misunderstood. We wish to clarify the following:

Electricity production (except - potentially - for a very small proportion of time limited exemptions in the new Member States) will not receive any free allowances as from 2013, which means that power prices should fully reflect the carbon price.

The amount of the free allocation to industrial sectors will be based on benchmarks based on the average performance of the top 10% most efficient installations (in terms of their greenhouse gas emissions) in the EU.

For the sectors deemed exposed to carbon leakage, these very ambitious benchmarks will be multiplied by 1 (= 100%) - while for non-exposed sectors, it will be multiplied by 80% in 2013, declining annually. There will thus not be "100% free" allowances covering all their emissions for any sector. The total 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 therefore also decline annually with the total emissions cap.

All this implies that even if a large number of installations are covered by the list of exposed sectors, only a small number of installations- at the most efficient extreme- may receive a large share of their needed allowances free of charge.

For the reasons set out above, the EU's treatment of sectors potentially at risk of carbon leakage is less 'generous' than might initially appear and certainly less generous than presented in recent press reports.

A successful international climate change agreement at the Copenhagen conference in December will significantly reduce the risk of carbon leakage. The Commission will therefore review the list in the light of Copenhagen and may propose revisions. This debate also shows yet again the need to secure an ambitious, comprehensive agreement at Copenhagen.

H.E. David Daly
Head of Delegation
Delegation of the European Union to Australia