Public Sector Network Tender Alert


An assessment of the risk of carbon leakage for sectors under the EU ETS

The EU ETS (EU Emissions Trading System) is Europe’s flagship policy for reducing greenhouse gas emissions by putting an EU-wide cap on emissions and creating a market for emissions. The declining cap trajectory under the EU ETS will help reduce emissions in 2020 by 21% as compared to 2005 levels. The absence of global carbon markets creates a risk of carbon leakage, i.e. the prospect that firms may relocate investment or production from Europe to the rest of the world in order to avoid the costs of climate change policy. This may occur if they cannot pass on the costs to consumers without significant loss of market share, leading to an increase in overall emissions. To mitigate the risk of direct and indirect carbon leakage, the EU ETS Directive currently favours the free allocation of allowances to those sectors deemed at significant risk of carbon leakage. The Government supports this in the absence of an international climate agreement, which would create a level playing field for industry inside and outside the EU. We believe the proportionate free allocation of allowances gives relief to sectors at significant risk of carbon leakage, without raising barriers to international trade. Sectors at risk of carbon leakage are assessed against the criteria and thresholds in the EU ETS Directive (see below) and the last full assessment was agreed via the EU comitology procedure in 2009.  the sum of direct and indirect costs of the EU ETS are greater than 5% of gross value added and the intensity of trade with non-EU countries is greater than 10%; or  the sum of direct and indirect costs of the EU ETS are greater than 30% of gross value added; or  the intensity of trade with non-EU countries is greater than 30% The EU ETS Directive allows for a review of sectors at risk every five years, with the possibility of adding sectors to the list on annual, ad hoc basis. The next substantive review of sectors will be in 2014. Under the current approach, about 170 sectors are deemed to be at risk of leakage, and DECC seeks to appraise whether this is an appropriate number. The European Commission will conduct a review of carbon leakage in 2014 which will revisit the list of sectors exposed to risk of leakage as well as some key assumptions used for determining whether key sectors are exposed to the risk of leakage, e.g. the assumed carbon price. This research will provide some useful evidence which DECC will be able to feed in to the 2014 review and thus influence the Commission’s approach on leakage to help adjust the list of leakage sectors. This project consists of five key elements: (i) An assessment of evidence to suggest that leakage has or has not occurred over Phase II of the EU ETS (ii) In-depth case studies to assess the risk of leakage for a specific set of sectors or sub-sectors (iii) An assessment of how the risk of leakage depends on the level of the carbon price and/or the tightness of the cap (iv) An assessment of the current approach for identifying sectors at risk of leakage and alternative approaches (v) An assessment of the merits of alternative approaches for mitigating the risk of leakage in light of evidence gathered

Ref: TRN 559/01/2013,


First Floor Area A, ,3 Whitehall Place
Andrew Beacom
0300 068 6024

Contract value: 120000.00GBP

Published: 15 Jan 2013, Receipt by: 22 Feb 2013