Carbon leakage is the idea that if a carbon price is imposed on manufacturers in the EU, then manufacturing will shift from the EU to other markets where there is not a carbon price or where the carbon price is lower. It is argued that this process causes losses of manufacturing jobs in the EU.
In order to protect manufacturers from carbon leakage, the Commission produced a list of companies which are vulnerable to carbon leakage, and these were given significantly more free allowances than other companies not vulnerable to carbon leakage.
The list is published in this decision: Commission Decision of 24 December 2009 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and sub-sectors which are deemed to be exposed to a significant risk of carbon leakage.
A sector or sub-sector is considered exposed to a significant risk of carbon leakage if the direct and indirect cost of carbon is over a certain percentage of gross added value or the intensity of trade with third countries is above a certain threshold, or a combination of these.
When making its calculations for the leakage list for 2013-2014, the Commission, in 2009 unaware of the forthcoming surplus of allowances, used in its assumptions an EUA price of 30 euro. Now we know that in that period the actual average price is more likely to be somewhere around 5 euro. As a result the Commission grossly overestimated the impact of the EU ETS on a number of industries, thus including a lot of companies in the “leakage list” which are actually far less vulnerable to carbon leakage according to intent of the Directive. Calculations by the consulting firm CE Delft published in 2013 suggested that using realistic assumptions about the EUA price would result in only 10% of industrial emissions being covered in the leakage list instead of the current 90%. http://www.cedelft.eu/art/uploads/CE_Delft_7917_Carbon_leakage_future_EU_ETS_market_Final.pdf
Looking forward to the revision of the leakage list for the period 2015-2019 it would be reasonable to assume that the Commission would take heed of its earlier forecasting error and would revise its assumptions to reflect reality. This would ensure that the Directive is implemented in the manner in which it was intended. But no! On 22nd January the Commission announced, in connection with the 2030 policy framework, a proposal which would maintain the current criteria and existing assumptions (including an assumed carbon price of 30 euro) for the rest of Phase 3.
No sane person thinks that it is reasonable to assume an average EUA price for Phase 3 of 30 euro.
Thus the Commission is knowingly proposing a false assumption for a very important mechanism in the EU ETS. What a sad day for the credibility of our laws, when, in order to make a policy politically feasible, it has to be stuffed with lies.
Is there some cunning plan behind this apparent conversion to mendacity by the good men and women of Brussels?
Political pragmatism tells us that the 40% reduction target for 2030 is the more important fight to fight. Therefore they should keep their rather damp gunpowder as dry as possible for that big fight. The Commission perhaps sees the leakage compromise as a small titbit for the dog of industry, to make the 40% target more palatable.
I am not so sure. Industry isn’t going to be grateful for the leakage gesture. It might gnaw for a while on the leakage bone, but it will still fight the 2030 target with teeth and claws. And, even if industry does not fight it now because 2030 seems a long way away, it will surely find a way to weaken the target if the carbon price begins to hurt. Now that industry has seen the Commission blink on leakage, it will fight with renewed vigour. Lobbyists might have kids and like walking in the hills, but they are utterly ruthless and amoral when it comes to their client’s narrow interest.
Note
The logic of the leakage list seems flawed in any case. It aims to protect companies from the economic impact of climate change legislation. Why make a special case for climate legislation?
How about child labour? What if we allowed companies in the EU to employ children if they can show that their competitors outside the EU employ children?
How about health and safety? How about building standards? Water treatment and sanitation? Animal husbandry standards?
Doing things right can indeed cost more. But the upside is that our societies are a bit safer, freer, fairer and more pleasant to live in.
European governments including the European Commission are scared. They are scared of Chinese and American competition, of a further banking crisis, of a collapse of the Eurozone, of losing elections to new parties like UKIP and Syrizia and of public outrage over energy prices. Therefore they won’t take actions that make these threats more powerful unless forced to.
It’s a pity that our leaders are not people of high self-sacrificing principle but they aren’t. You don’t get many Mandelas per century.
Hi, I think this is a great post, and an issue well worth highlighting. Regarding your footnote though, carbon leakage is surely different to those other standards like health and safety, child labour and water treatment.
Water, health and child labour standards will be effective in the EU regardless of whether industries move away (to exploit workers and the environment in other countries). The benefits for European society in terms of cleaner water, better health and effective family life would remain (despite any most unfortunate increases in malpractice abroad).
But the effectiveness of climate policy will be undermined if industry moves away to pollute more carbon elsewhere. In that case emissions have only been shifted, not reduced – so that no one benefits.
Of course this a fundamental reason why climate policy is so difficult: the climate problem is transnational in a way that domestic environmental and labour concerns are not.
Even so, the blatantly flawed assumptions and vested interests lying behind the EU’s leakage list are shocking, so thanks for drawing attention to this.