Assessing the potential carbon leakage risk under EU ETS Phase 3 and 4
Carbon leakage can be defined as a ‘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 – consequently, this could result in an increase in their total emissions. In response to the potential risk of carbon leakage for industries covered by the EU ETS, a higher share of free allowances are given to sectors and sub-sectors that are deemed to be exposed to a ‘significant risk’ of carbon leakage compared to other industrial sectors in the third and fourth trading periods of the EU ETS.
The project is conducted by Trinomics in collaboration with Öko-Institut (lead), Ricardo Energy & Environment and adelphi Consult GmbH. The project will run from December 2019 and will finish by August 2020.
This investigation provided the following preliminary results:
- Examine whether there is evidence of carbon leakage occurring in the 3rd trading phase of the EU ETS as a result of carbon pricing and;
- To provide insights whether the sectors assessed could be more or less challenged and exposed to carbon leakage in EU ETS Phase 4 in a scenario of stepped up climate ambition in the EU. Within the scope of the assignment, we are providing a backward looking assessment of the evidence of carbon leakage during the third trading period of the EU ETS (Task 1), while Task 2 (led by Trinomics) provides a forward looking impact assessment on future carbon leakage risks has to rely on scenarios of likely carbon pricing developments. Moreover, Task 2 will also explore options for alternative measures to prevent carbon leakage such as carbon border adjustment mechanisms. As part of the assignment, there is some consultation with stakeholders foreseen as well via technical workshops in order to cross-check the findings (Task 3, also led by Trinomics).