INCEPTION IMPACT ASSESSMENT

Inception Impact Assessments aim to inform citizens and stakeholders about the Commission's plans in order to allow them to provide feedback on the intended initiative and to participate effectively in future consultation activities. Citizens and stakeholders are in particular invited to provide views on the Commission's understanding of the problem and possible solutions and to make available any relevant information that they may have, including on possible impacts of the different options.

Title of the initiative

Carbon Leakage List 2021 - 2030

Lead DG (responsible unit)

DG Climate Action, Unit B2

Likely Type of initiative

Commission Decision (delegated/implementing to be determined by the revised EU ETS Directive)

Indicative Planning

Q4 2018

Additional Information

https://ec.europa.eu/clima/policies/ets/allowances/leakage_en  

The Inception Impact Assessment is provided for information purposes only. It does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content. All elements of the initiative described by the Inception impact assessment, including its timing, are subject to change.

A. Context, Problem definition and Subsidiarity Check

Context

The EU Emissions Trading System (EU ETS) 1  is the cornerstone of European Union's climate policy and the key tool for achieving EU's objective of reducing greenhouse gas (GHG) emissions cost-effectively. Under the EU ETS, the Commission must determine a list of sectors and subsectors deemed to be exposed to a significant risk of carbon leakage, following an assessment of relevant industry. The sectors and subsectors on the list receive a higher level of free allocation of allowances.

The legislative process to revise the EU ETS in line with the 2030 climate and energy targets 2 is currently ongoing. While the revised EU ETS Directive will determine the criteria and thresholds for the assessment of the carbon leakage risk, there are several methodological choices and elements required to implement the Directive not defined in the legal text. These methodological elements will therefore be subject of this impact assessment.

Problem the initiative aims to tackle

The initiative aims to implement the provisions of the EU ETS Directive regarding carbon leakage. Carbon leakage refers to a possible increase in global emissions linked to the relocation of industry, due to costs of climate policy to countries with no or limited climate policies in place.

The EU ETS is an essential instrument in ensuring that the EU attains its emission reduction targets. The default method of allocating allowances is auctioning, however, energy intensive industries receive a share of allowances for free in order to address the risk of carbon leakage. In line with the 2030 climate and energy policy framework agreed by the EU leaders in October 2014 3 , free allocation will continue beyond 2020 until other major economies undertake similar climate policies and measures. The strategic decision by the European Council and the proposed carbon leakage provisions strike the right balance at this point in time, but should be kept under review in the coming decade, in light of the Paris Agreement 4 .

The impact assessment will define the methodological elements needed to implement the Directive as regards the determination of the list of sectors at significant risk of carbon leakage. The impact assessment needs to take into account new data, consider a number of methodological elements to be determined in order to perform the assessments, and provide a framework for several types of assessments that will be conducted.

Basis for EU intervention (legal basis and subsidiarity check)

The legal basis for the carbon leakage list includes Articles 191 to 193 of the Treaty on the functioning of the European Union and the revised EU ETS Directive (Article 10b) 5 . The subsidiarity check has already been performed in the Impact Assessment accompanying the Commission ETS Revision proposal 6 .

The EU ETS is an EU-wide measure, setting the EU emissions reduction targets as well as the modalities and means of achieving them. As such, the carbon leakage list is best determined at the EU level to ensure a harmonised approach whereby all industry sectors across all Member States and EEA/EFTA countries are treated the same way as participants to the same internal market.

B. Objectives and Policy options

The carbon leakage list is established in order to determine which industry sectors/subsectors are most exposed to the risk of carbon leakage and are consequently eligible to receive a higher share of free allocation. The aim of free allocation is to address competitiveness concerns of industry regarding the risk of carbon leakage, while maintaining the incentive to decrease emissions, thereby facilitating the transition to a low carbon economy.

The EU ETS Directive foresees the criteria, thresholds and types of assessments underpinning the determination of the carbon leakage list. The default approach to the assessment as laid down in the Directive identifies a combined quantitative criterion: emissions intensity and trade intensity. Notwithstanding, methodological choices for the following parameters of the assessment need to be considered before the list can be established:

1)For emissions intensity: emission factor for electricity, to convert electricity consumption into indirect emissions

2)For trade intensity: providing an assessment of other countries' climate policies to determine their comparability with the EU ETS;

3)Framework for additional assessments:

a.Qualitative assessments: further details on how best to ensure a comparable level of robustness (including high quality data) to the one inherent to the default quantitative assessments, as well as transparency and equal treatment among sectors

b.Disaggregated assessments: further details on how best to ensure a comparable level of robustness (including high quality data) to the one inherent to the default quantitative assessments, as well as transparency and equal treatment among sectors

The parameters listed above with the exception of point 3 a. have been assessed in the Impact Assessment for the currently valid Carbon Leakage List (2015 – 2019) 7 . These methodological parameters need to be revisited as a consequence of the changed assessment criteria pursuant to the revised ETS Directive; because of the new data that will be collected for the exercise; and because of the need to ensure a transparent process enabling the stakeholders to express their views.

C. Preliminary Assessment of Expected Impacts

Likely economic impacts

The main elements that determine which sectors/subsectors are on the carbon leakage list are laid down in the EU ETS Directive. Among the parameters that will be subject to this Impact Assessment as listed in the previous section, parameter (2) may have some impact, while parameters (1) and (3) will likely have limited economic impact. Nevertheless, the choices for the different parameters will ultimately impact the number of sectors and amount of emissions covered by the carbon leakage list.

Sectors/subsectors on the carbon leakage list receive a higher level of free allocation. Any shortage of allowances, linked to efficiency and emission levels, is covered by purchasing on the market. Therefore, there may be a financial impact on companies from the relevant industry sectors.

While at present, ETS costs constitute a very small share of the total costs for industrial sectors covered by the ETS, even for energy intensive industries, the situation might change in the future.

Likely social impacts

The assessment of social impacts carried out in the Impact Assessment 8 accompanying the Commission proposal for the revised EU ETS Directive concluded that the system as a whole has limited social impact. As the carbon leakage list Impact Assessment will only focus on methodological choices with limited economic impact, it is likely that the social impacts will also be marginal.

Likely environmental impacts

The EU ETS has been put in place to ensure that the EU achieves its emission reduction targets. The achievement of the targets is ensured by setting a limit ("cap") on the total emissions coming from the sectors covered by the EU ETS. As the cap is set outside the carbon leakage list, the environmental impact of the latter is limited. Nevertheless, the carbon leakage list is a key element of the free allocation rule which is meant to prevent an increase in global emissions and to incentivise emission reduction for industry in the low-carbon economy transition.

Likely impacts on fundamental rights

There will likely be no impacts of this initiative on fundamental rights such as personal data or gender equality.

Likely impacts on simplification and/or administrative burden

The impacts on simplification and administrative burden are mainly linked to the provisions laid down in the Directive and the ETS Directive revision process might bring additional administrative concerns depending on the final specific thresholds and framework for additional assessments.

All sectors and subsectors across the Member States and EEA/EFTA countries will be assessed in a harmonised manner. Within the framework set by the ETS Directive the Impact Assessment will consider how best to simplify and harmonise the additional assessments. The resulting Decision on the carbon leakage list applies directly to Member States who have the experience of two previous lists and several years of applying free allocation rules. The costs and benefits related to the additional assessments and the resulting Decision will to the extent possible be quantified in the Impact Assessment.

D. Evidence Base, Data collection and Better Regulation Instruments

Impact assessment

The initiative will be accompanied by an Impact Assessment. The purpose is to assess various methodological choices that must be clarified before the carbon leakage list can be determined. The Impact Assessment exercise, along with the various consultation methods and tools (as explained below) is meant to ensure transparency of the process so that the assessments to be carried out are in accordance with the provisions of the revised EU ETS Directive and are based on a clear, transparent methodology.

Evidence base and data collection

A number of information and data sources are already available:

previous carbon leakage list exercise resulting in the list valid for 2015-2019 9 (to be extended for 2020 with the revised ETS Directive 10 )

evaluation accompanying the ETS Directive revision proposal 11

open consultation carried out regarding carbon leakage and free allocation post-2020 12

open consultation carried out regarding the carbon leakage list valid between 2015 and 2019 13

stakeholder events regarding carbon leakage post-2020 14

In the coming months (end of 2017 – beginning of 2018) the Commission intends to consult stakeholders and Member States on the methodology and choices to be made in order to carry out the assessments. Data will be collected for the assessment primarily from official sources to be complemented from other sources, as needed.

Consultation  of citizens and stakeholders 15  

The aim of the stakeholder consultation strategy is to ensure transparency of the data collection and assessment by the Commission resulting in the carbon leakage list. To this end, the following will be included in the process:

a 4 week feedback period for the Inception Impact Assessment, autumn 2017

a 12 week online public consultation for the specific parameters that will be considered in the Impact Assessment, autumn – winter 2017

publication of a preliminary list and steps to follow, possibly at a stakeholder event, spring 2018

technical level consultation of Member State experts throughout the process

The stakeholder categories relevant for the process are industry and industry associations, NGOs, Member States and EEA/EFTA countries, European Commission services, academia/researchers and the EU citizens.

Will an Implementation plan be established?

The carbon leakage list will take the form of a Commission Decision directly applicable to all Member States and listing all sectors that should receive a higher share of free allocation in the context of the EU ETS. As such no implementation plan is needed.