The European Commission will need to slash the amount of free carbon emission allowance

The European Commission will need to slash the amount of free carbon emission allowances given to industry under the European trading scheme (EU:ETS) from 2015 - because CO2 prices are too low to put companies at real risk of carbon leakage, research by an influential European thinktank suggests.

Carbon leakage refers to threats by companies to quit Europe due to the EU:ETS.

Revising the carbon leakage list to take account of lower than expected carbon prices could mean only 33 per cent of sectors would fit the criteria, a CE Delft study indicates. Some 90 per cent of industry's greenhouse gas emissions would now be excluded from special treatment. At present, 60 per cent of industrial sectors covered by the EU:ETS are on this “discount” list.

But any attempt to tighten the carbon leakage list will meet with stiff opposition. The commission is likely to come under intense pressure to find a way to protect energy-intensive industries such as steel, paper, aluminium and cement from having to buy more allowances at auction. This lobby has already persuaded the European Parliament to vote against holding back new allowances for five years (see also page 11).

The carbon leakage list must be revised every five years, with the first such revision to take place in 2014 for implementation from 2015 onwards.

But while the existing list is based on an assumed carbon price of €30 per tonne of CO2 equivalent, the benchmark EU contract is now trading at around €3/tCO2e. CE Delft's study assumes a projected carbon price of €12/tCO2e, far higher than most analysts now anticipate.

In phase 3 of the emissions trading system (ETS), from 2013-20, only electricity generators must buy all of their allowances. Other sectors not deemed to be at risk of carbon leakage get 80 per cent of their allowances free today, falling gradually to 30 per cent by 2020, with the eventual aim of no free allocations by 2027.

Under benchmarking rules, sectors on the leakage list get extra free allowances.

A spokesman for the energy-intensive industry lobby said companies are “very concerned” by this upcoming revision - and will push for €30/tCO2e to continue to be the baseline price “because otherwise many sectors will fall off the list”.

A Eurofer spokesman, representing the steel industry, said that if the industry were subject to non-leakage rules, it could add €5 per tonne to the cost of finished steel, compared with a €30/t margin at present. “We are going to discuss with the commission how they intend to make their assessment,” he added.

Under existing rules a sector is deemed to be at risk if more than 10 per cent of its products are imports and exports, and if the direct and indirect costs of ETS compliance would add at least 5 per cent to its production costs.

If these extra costs are at least 30 per cent or if imports and exports are above 30 per cent, the sector is also deemed to be significantly exposed.

CE Delft has argued that a new impact assessment will be needed as part of the 2014 review, because if promised ETS reforms fail  - as now seems likely following the EP vote - and the carbon price  remains low, the threat of carbon leakage “logically becomes much smaller”.

Significantly, the official EC website page on carbon leakage now acknowledges   that low prices and high surpluses of allowances accumulated by industry mean “the risk of carbon leakage in the absence of any free allocation is estimated to be considerably lower than when the climate and energy package was adopted in 2009”.

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