Determining the second carbon leakage list of sectors and subsectors exposed to significant list of carbon leakage will in the coming months be an important process, interested parties should not overlooked. At the outset of the said procedure it may be useful to briefly summarise the basic legal environment for the issue.
Definition of the ‘carbon leakage’
Carbon leakage is defined as ‘an increase in greenhouse gas emissions in third countries where industry would not be subject to comparable carbon constraints’ (legal base: recital 24 of the Directive 2003/87/EC as amended in 2009 (ETS Directive).
Carbon leakage list
Carbon leakage list pursuant to ETS Directive 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 EU Emissions Trading Scheme.
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.
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.
Legal base for determining the carbon leakage list
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.
Procedure for determining carbon leakage list
This 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’.
First carbon leakage list
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)
It applies for the years 2013-2014.
Time-frames for application of the carbon leakage lists
Carbon leakage lists are to be established by 31 December 2009 and every five years thereafter.
The first list was adopted in 2009 and applies for the years 2013-2014.
The second one will need to be adopted during 2014 with the term of the validity 2015 to 2019.
The carbon leakage list must be determined based on the quantitative and qualitative criteria laid down in the ETS Directive. The Commission established the general methodology for the application of those criteria while determining the first carbon leakage list.
Since the criteria for including a certain sector or subsector in the carbon leakage list are outlined in the ETS Directive, the assessment of sectors for the determination of the second carbon leakage list (valid for the years 2015-2019) will be done based on the same criteria as for the first carbon leakage list and the annual additions. According to the Directive, data to be used are from the three most recent years at the time of the data collection.
The methodology, and certain assumptions, used to determine the first list may however require some amendments.
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.
Data elements that would need to be taken into account for the determination of the second carbon leakage list
The following data elements would need to be taken into account for the determination of the second carbon leakage list:
Direct carbon costs for each of the sectors eligible for analysis defined as the costs associated with the allowances which might need to be purchased by the sector to meet the surrendering obligation of the ETS Directive. The direct costs should be estimated based on the relation of the direct emissions of the sector to the gross value added (GVA) of the sector.
Indirect carbon costs for each of the sectors eligible for analysis defined as the costs indirectly associated with the ETS Directive, such as electricity costs. The indirect costs should be estimated as a relation of the indirect emissions of the sector, calculated by taking into account the electricity consumption and electricity emissions factor to the gross value added (GVA) of the sector.
Gross value added at factor costs as defined in the Eurostat methodology for each sector eligible for analysis.
There might be a need to remove countries from the scope of the trade intensity assessment, if deemed necessary based on an analysis of the impact of Article 10a(18a) of the ETS Directive.
According to Article 10a(17) of the ETS Directive, sectors or subsectors can be assessed also based on qualitative criteria: emission reduction potential and cost, market characteristics and profit margins and it is estimated that the scope of the qualitative assessments will cover maximum sectors.
The European Commission has currently announced the call for tender ‘Carbon leakage and competitiveness assessment’ (time-limit for receipt of tenders 23 August 2012, CLIMA.B.2/SER/2012/0019, available at ec.europa.eu/clima/tenders/tenders_en.htm).
So, it is apparent that the work on the second carbon leakage list in the coming moths will gain momentum. It is obviously the key issue to monitor for interested stakeholders.
For more information see also Final report 'Support to the Commission for the determination of the list of sectors and subsectors deemed to be ex- posed to a significant risk of carbon leakage for the years 2015-2019 (EU Emission Trading System)' dated January 2013.