Commission Decision determining a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage


 

Carbon Leakage, Carbon Leakage List and Carbon Leakage Exposure Factors

 

Carbon leakage is defined as ‘an increase in greenhouse gas emissions in third countries where industry would not be subject to comparable carbon constraints’ (recital 24 of the Directive 2003/87/EC as amended in 2009 (ETS Directive).

 

Carbon leakage pursuant to ETS Directive list denotes the specific measure aimed to address the risk of carbon leakage, it determines sectors and subsectors exposed to that risk in the third trading period (2013-2020) of the European Union Emissions Trading Scheme (EU ETS).

 

 

Significance of the carbon leakage list

 

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

 

Industrial sectors receive 80% of benchmarked allowances for free in 2013 decreasing annually to 30% in 2020.

 

Those sectors which are deemed to be exposed to carbon leakage an included in the relevant list receive 100% of the benchmarked allowances for free (see table).

 

The benchmarks reflect the average performance of the 10% most efficient installations (in terms of their greenhouse gas emissions) in a sector or subsector in the EU) what creates additional incentives for ETS installations to reduce emissions and improve energy efficiency.

 

The carbon leakage list determines the sectors that get more free allocation than otherwise that would be the case.

 

The amount of free allowances affects companies' cash-flows because depending on carbon efficiency and emissions, it influences on the amount of allowances companies have to purchase.

 

The legal base for determining the carbon leakage list is Article 10a(13) of the ETS Directive, which obliges the European Commission in that regard. The list is to be adopted by the Commission after agreement by Member States and scrutiny by the European Parliament and Council through the so called ‘comitology procedure’.

 

The first carbon leakage list was adopted by the Commission Decision No 2010/2/EU of 24 December 2009 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage (OJ L 1, 5.1.2010, p. 10 as amended) and was modified in years 2011, 2012 and 2013.

 

The first carbon leakage list applied for the years 2013-2014. It is noteworthy that sectors included couldn't be removed from the list before 2014 (see: Guidance Document n°5 on the harmonized free allocation methodology for the EU-ETS post 2012, p. 7). However, additions were possible before that date (see further).

 

The classifications used for the assessments made in the first list are NACE and PRODCOM codes of sectors, subsectors and products. NACE codes are 4-digit codes used to classify which specific sector an installation belongs to, based on the activities carried out. The codes are taken from the Classification of Economic Activities in the European Community.

Pursuant to the above Guidance Document Version 1.1 of NACE should be used for the determination of the carbon leakage status.

 

The PRODCOMcode is an 8-digit code and stands for the PRODucts of the European COMmunity Inquiry. It is a survey of manufactured products governed by an EU Regulation (3924/91). The product definitions are standardised across the EU to give comparability between Member States’ data and the production of European aggregates at product level. There is a direct relationship between the NACE and PRODCOM codes and the first 4 digits of the PRODCOM code match the 4 digits of the NACE v1.1 code. It is important to note the 2007 version of PRODCOM codes should be used as this relates to NACE v1.1

 

According to Article 10a(15) and (16) of the ETS Directive, there are two criteria to be taken into account in the quantitative assessment of the sectors:

 

1) their carbon costs as share of gross value added, and

 

2) the trade intensity with third countries (defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the EU (annual turnover from third countries)).

 

The ETS Directive stipulates that if the carbon costs are above 5% and the trade intensity is above 10%, or either of them is above 30%, the sector can be included in the carbon leakage list.

 

Carbon Leakage Exposure Factors

Year

 

2012

2014

2015

2016

2017

2018

2019

2020

Exposure factor for significant carbon leakage risk

1

1

1

1

1

1

1

1

Exposure factor for no significant carbon leakage risk

0.8000

0.7286

0.6571

0.5857

0.5143

0.4429

0.3714

0.3000

 

 

The carbon leakage exposure factor is applied at sub-installation level.

 

To calculate the amount of allowances for benchmarked products, the carbon leakage list is used - if the product is on the list (i.e. the NACE code or the PRODCOM code is on the list) the factor to use is 1, if not, the declining factor given in table above is to be used.

 

In line with the above-mentioned Guidance Document, for carbon leakage factors applied to fall-back approaches (i.e. where the sub-installation at issue is not the product-benchmark sub-installation) the carbon leakage exposure factor to use depends on whether or not the heat, fuel or process emissions are associated with a process to manufacture a product included in the carbon leakage list.

 

In the case that a sub-installation exports heat to an ETS plant, the carbon leakage status of the heat-importing ETS plant is applied. This can be derived from the carbon leakage list depending on the product(s) that the importing plant manufactures. There is the needs to define the carbon leakage status of the installation receiving the heat because allowances are given to heat consumers, unless the importing installation is not in the ETS in which case the allowances are given to the producer of the heat.

 

If a sub-installation exports heat to a non-ETS plant, the carbon leakage status of the importing installation is assumed to be not at risk by default, unless the “at risk” status of the importing installation not in the ETS can be proven and the relevant documentation is included in the data collection report.

 

Carbon leakage list amendments and the second carbon leakage list for the period from 1 January 2015 to 31 December 2019

 

Carbon leakage lists are to be established by 31 December 2009 and every five years thereafter. The first list was adopted in 2009 and applied for the years 2013-2014. The second has been adopted during 2014 with the term of the validity from 2015 to 2019.

 

The above notwithstanding, the possibility of adding sectors or subsectors each year is foreseen in Article 10(a) paragraph 13 of the EU ETS Directive if it can be demonstrated, in an analytical report, that this sector or subsector satisfies the criterioil aid down in the Directive, following a change that has substantial impact on the sector's or subsector's activities. This possibility was used in 2011 , 2012 and 2013.

 

The EU Climate Change Committee in July 2013 approved the addition of two other sectors and four sub-sectors to the current list (for the period 2009-2014)- see the European Commission communication of 10 July 2013. The two sectors are plaster and plasterboard, both of which belong to the gypsum industry. The four sub-sectors are open-die forging, solid whey and two sub-sectors related to processed potato products.today  of sectors deemed exposed to significant risk of carbon leakage. The above communication reminds, assuming the European Parliament and Council raise no objections, this addition will imply higher free allocation of emission allowances for these sectors and sub-sectors for the year 2014.

 

In turn, on 5 May 2014 the European Commission has sent its draft proposal for a 2015-2019 carbon leakage list (documentation consisting of the Proposal for the 2015-2019 carbon leakage list and the Annex to the proposal) to the EU Climate Change Committee.

Since there were no objections raised by either the European Parliament or the Council during the three-month scrutiny period, and  the Climate Change Committee (in which all Member States are represented) issued positive opinion the new framework has been finalised on 27 October 2014 (the Commission's Decision of 27 October 2014 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, for the period 2015 to 2019 (2014/746/EU) with the European Commission adoption of the carbon leakage list for the period 2015-2019 (see the impact assessment). With comparison to the draft list that had been published on 5 May 2014 no further changes were made.

 

As the European Commission reports in the relevant communication of 27 October 2014, this second carbon leakage list "provides regulatory predictability for industry for the period from 1 January 2015 to 31 December 2019 and succeeds the first carbon leakage list that is still valid until 31 December 2014. According to the ETS Directive, it will be possible to add further sectors to the list if they comply with the criteria stated in the Directive, but it will not be possible to remove sectors from the list until its expiration".

 

The final Commission Decision establishing the second carbon leakage list for years 2015 - 2019 is available here.

 


 

Equivalent measures in other cap-and-trade schemes

 

Information on the California equivalent for the European carbon leakage list is available under the following link.

 

Carbon leakage list beyond 2020

 

Questions and answers on the proposal to revise the EU emissions trading system (EU ETS), Brussels, 15 July 2015, p. 2) confirms, apart from some minor improvements, the basic EU ETS architecture will remain in place after 2020. 

 

The said document also acknowledges, as currently, under the post-2020 EU low carbon framework all major industrial sectors will be considered at risk of carbon leakage.

 

 

European Commision's Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments of 15 July 2015 (COM(2015) 337 final) 2015/148 (COD)

 

Article 10b

Measures to support certain energy-intensive industries in the event of carbon leakage

 

1. Sectors and sub-sectors where the product exceeds 0.2 from multiplying their intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area (annual turnover plus total imports from third countries), by their emission intensity, measured in kgCO2 divided by their gross value added (in €), shall be deemed to be at risk of carbon leakage. Such sectors and sub-sectors shall be allocated allowances free of charge for the period up to 2030 at 100% of the quantity determined in accordance with the measures adopted pursuant to Article 10a.

 

2. Sectors and sub-sectors where the product from multiplying their intensity of trade with third countries by their emission intensity is above 0.18 may be included in the group referred to in paragraph 1, on the basis of a qualitative assessment using the following criteria:

(a) the extent to which it is possible for individual installations in the sector or sub-sectors concerned to reduce emission levels or electricity consumption;

(b) current and projected market characteristics;

(c) profit margins as a potential indicator of long-run investment or relocation decisions.

 

3. Other sectors and sub-sectors are considered to be able to pass on more of the cost of allowances in product prices, and shall be allocated allowances free of charge for the period up to 2030 at 30% of the quantity determined in accordance with the measures adopted pursuant to Article 10a.

 

4. By 31 December 2019, the Commission shall adopt a delegated act for the preceding paragraphs for activities at a 4-digit level (NACE-4 code) as concerns paragraph 1, in accordance with Article 23, based on data for the three most recent calendar years available.

 

 

See also:

 

Carbon Leakage - State Aid Rules

 

European Commission carbon leakage website

 

http://ec.europa.eu/clima/news/articles/news_2014102701_en.htm 

 

 

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Last Updated on Sunday, 10 April 2016 13:27
 

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