On the 8th May the provisional Phase IV carbon leakage list was released, with significant reductions in the numbers of sectors and sub-sectors covered. The new list is comprised of just 44 sectors and sub-sectors, down from more than 170 in Phase III. This implies significant cost increases in Phase IV for affected companies – if your sector or sub-sector hasn’t made it onto the list your free allocation will be significantly affected.
What is carbon leakage?
According to the European Commission, “Carbon leakage refers to the situation that occurs if, for reasons of costs related to climate policies, businesses in certain industry sectors or sub-sectors were to transfer production to other countries with less stringent emission constraints.” For example, a company located in Spain and captured by the EU ETS may decide to move production to North Africa to avoid the cost of carbon if the cost is too high. Not only would such a development destroy jobs in the EU, but it would also run the risk of increasing emissions (for example if production were to shift to a less efficient plant), thus running the risk of cancelling out the efforts made by the EU to curb emissions. Free allocation is distributed to address such competitiveness concerns by lowering the effective carbon costs for energy intensive industry sectors and sub-sectors that cannot pass the cost of carbon on to their customers through higher prices.
How big are the changes to the carbon leakage list for Phase IV?
A massive 134 sectors and sub-sectors have been removed from the Phase IV leakage list. Those removed from the carbon leakage list can expect their free allocations to fall from 100% of their calculated free allocation based on the applicable benchmark to a maximum of 30% in 2021. This will decline steadily to 0% over the second half of Phase IV (2026-2030).
28 sectors and sub-sectors that have dropped off the leakage list for Phase IV are eligible for a second-level assessment and face a tight deadline to apply to the European Commission, via their Member States, for this assessment.
In an environment of significantly higher EUA prices, tripled from 2017’s lows, those who drop off the carbon leakage list will face materially higher compliance costs.
Where can I find out more about my carbon leakage list status?
We’ve written a free guide to how companies in the EU ETS will be affected by the new carbon leakage list and what they need to do by when. Please contact us and we will send you a copy.
Redshaw Advisors specialise in helping companies understand and manage their EU ETS risks. To talk to one of our award-winning consultancy team call us on +44 203 637 1055 or email us at: email@example.com.