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EU countries and industrials split on carbon leakage price

01 Nov 2013 18:46:30 | edcm


European governments and manufacturing companies could not agree on whether the carbon price used in a calculation assessing how many industrial sectors are at risk of relocating outside of Europe because of costs associated with the emissions trading system (ETS) should be lowered from the current €30/tCO2e, an EU consultation showed.

The European Commission is in the process of drafting a new list of sectors considered at risk of relocating to countries with milder climate regulation – so-called carbon leakage risk – for the years 2015-2019. The commission said in May it was evaluating its option and could base the calculation on a carbon price lower than the €30.00/tCO2e value underpinning the current list.

A change in price can influence the amount of free EU allowances (EUAs) allocated to industry and consequently the number of permits auctioned by EU governments.

Industrials previously made it clear they considered any price change illegal ( see EDCM 11 June 2013 ), although a carbon price of €30/tCO2e is six times higher than the current carbon price on the market. They further reinstated their beliefs in the replies to the consultation on the issue in August.

In a summary of those replies collected by the commission, the vast majority (93%) of industrial stakeholders – which accounted for over 90% of all respondents – believe the €30/tCO2e is “adequate value”. However, some still advocated using a €60/tCO2e to €90/tCO2e price.

“In a forward-looking approach for the qualitative assessment, the EU ETS should be resistant to carbon leakage until e.g. €60-90/tCO2e, because for new investments planned after the crisis and started up by 2020, the relevant time horizon is 2020-2035 to 2040,” said PlasticsEurope, an association representing the interest of the plastics manufacturing industry in western Europe, in its submission.

On the other hand, six governments out of the eight that responded (United Kingdom, Belgium, Portugal, Slovakia, Estonia and some regional authorities from Spain) were in favour of an assessment based on a price closer to reality, using the “best available evidence of what the carbon price is likely to be over the period of list validity.”

Opposing interests

Being part of a sector included in the carbon leakage list grants companies more free allowances (EUAs). For those on the list, the free allocation will be kept at the same level for every year in phase III. For other sectors, the number of free allowances will decline steadily until a 70% cut in the number of free allowances is reached in 2020. The higher the carbon price assumed in the calculation supporting the list is, the higher the calculated cost to EU industry and the number of sectors granted more free EUAs will be. This, in turn, also influences the share of permits auctioned by EU governments, calculated as the overall cap minus free allocation.

Governments and producers have opposing interests when it comes to free allocation. If more EUAs are allocated for free as a result of the list, manufacturers incur lower costs. But if fewer EUAs are allocated for free, more EUAs are auctioned and EU countries pocket more.

Does the risk really exist?

In the EU consultation, the companies and governments again disagreed whether the carbon leakage risk is increasing. According to the companies, there is a significant or slight increase of carbon leakage risk, while EU countries and civil society saw it slightly or significantly decreased.

But an Ecorys consultancy report commissioned by the EU executive in September found “no evidence for any carbon leakage” in phase I and II of the ETS.

Over phase III, industrials will still receive some 43% of the phase cap – or 6.6bn EUAs – for free, with more available to new entrants. According to a commission chart, 2013 free allocation will be higher than annual phase II emissions, excluding 2008.

Because of that, a large number of industrial installations entered phase III with a considerable long position, having carried over a large EUA surplus from phase II. Silvia Molteni

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