Executive summary

The current EU ETS rules have granted preferential treatment to industrial companies deemed at risk of “carbon leakage” in the form of awarding free pollution permits. The ongoing legislative process to revise the EU ETS rules for the post-2020 period provides an important opportunity to revisit the rules under which industrial sectors may be deemed at risk of carbon leakage. The current rules are in urgent need for reform for the following three reasons:

1.  To date there has been no compelling evidence that EU’s climate policies are forcing companies to move abroad and recent academic studies indicate that this is also unlikely to happen in the future even with a complete phase-out of free pollution permits.

2.  Free allocation has disincentivised companies to invest in sustainable technologies. The result is that certain European industries have fallen behind the global average in carbon efficiency and saw their competitive advantage decrease. Phasing-out free allowances and increasing the share of auctioned allowances can mobilise up to €160 billion that can be ring-fenced for low-carbon breakthrough technologies in industrial sectors.

3.  Handing out free pollution permits has led to windfall profits at the expense of taxpayers. These windfall profits are the result of industries letting their customers pay the price for freely obtained carbon permits. Certain industrial sectors are furthermore over-allocated with free carbon permits due to flawed EU ETS rules: companies receive free carbon permits based on historical production levels even if current production levels are cut by almost half. These excess emission rights can be sold for a windfall profit in the market.

This policy brief sheds light on the myths of carbon leakage and gives recommendations how to change the current rules in the overview table on page 10 and 11.

Read policy brief here