Carbon Leakage: EU Commission to Adopt State Aids Guidelines by mid-June 2012

In the framework of the revised EU Emissions Trading scheme (EU ETS) established by Directive 2003/87/EC, the amending Directive 2009/29/EC defines a set of new provisions on carbon leakage.

Carbon leakage relates to a situation where the additional constraints put on European industries as a consequence of the more stringent EU climate change obligations may affect their competitive situation and lead to re-localisation in countries without such constraints.

Pursuant to Article 10 a.15 of the revised EU ETS Directive, a sector or sub-sector is "deemed to be exposed to a significant risk of carbon leakage" if:

• "the sum of direct and indirect additional costs induced by the implementation of this directive would lead to a substantial increase of production cost, calculated as a proportion of the Gross Value Added, of at least 5%; and
• the Non-EU Trade intensity defined as the ratio between total of value of exports to non EU + value of imports from non-EU and the total market size for the Community (annual turnover plus total imports is above 10%)."

Supplementary criteria are set in the directive.

Amending Directive 2009/29/EC defines mainly two alternatives to tackle the risk of carbon leakage:

1. free allowances for the sectors exposed (as an exception to the main rule of full auctioning in next trading period);
2. additional financial compensation in the form of state aids for the sectors exposed (at stake below).

Article 10 a) 6) of the revised EU ETS Directive provides for the possibility for Member States to compensate the most electro-intensive sectors for increases in electricity costs resulting from the EU ETS through national state aid schemes. The provision reads as follows:

"6. Member States may also adopt financial measures in favour of sectors or subsectors determined to be exposed to a significant risk of carbon leakage due to costs relating to greenhouse gas emissions passed on in electricity prices, in order to compensate for those costs and where such financial measures are in accordance with state aid rules applicable and to be adopted in this area.

Those measures shall be based on ex-ante benchmarks of the indirect emissions of CO2 per unit of production. The ex-ante benchmarks shall be calculated for a given sector or subsector as the product of the electricity consumption per unit of production corresponding to the most efficient available technologies and of the CO2 emissions of the relevant European electricity production mix."

As a consequence, the Commission is supposed to modify the Environmental State Aid Guidelines. It has proceeded to two consultations rounds in 2011 and 2012 on draft state aid guidelines, which raised a huge interest from the stakeholders. Guidelines might not to be legally binding, but they set an important framework in the treatment of state aids measures by the European Commission, and its appraisal of the compatibility criteria under Article 107(1) of the TFEU.

Four types of state aid measures were foreseen by the Commission in its 2012 public consultation:

1. aid to compensate increases in electricity prices resulting from the inclusion of the costs of greenhouse gas (GHG) emissions due to EU ETS;
2. investment aid to highly efficient power plants, including new energy power plants which are ready for the environmentally safe capture and geological storage of carbon dioxide (CCS-ready);
3. optional transitional free allocation in the electricity sector in some Member States;
4. exclusion of certain small installations from the EU ETS if the GHG reductions can be achieved outside the framework of the EU ETS at lower administrative cost.

According to ENDS Europe, the European Commission will adopt the new guidelines by mid-June 2012.