Interpreting the rules for EU ETS Phase III

The document examines the criteria for identifying sub-sectors exposed to a significant risk of carbon leakage under EU ETS Phase III. It argues that calculating additional costs without accounting for free allowances is logically inconsistent, as free allocation is intended to mitigate the very leakage it is meant to identify. Using UK data, the author illustrates that a gradual inclusion of sectors as free allocations decline from 80% in 2013 to 30% by 2020 provides better visibility, allows for learning, reduces economic distortions, and maintains incentives for international climate cooperation.

• A manufacturing sub-sector is classified as having a significant risk of carbon leakage if it meets one of three criteria: (I) a combination of production cost increases of at least 5% of Gross Value Added and Non-EU Trade intensity above 10%; (II) production cost increases of at least 30% of Gross Value Added; or (III) Non-EU Trade intensity above 30%.
• The author contends that ignoring free allowance allocations when calculating additional costs is fundamentally inconsistent because if free allocation is the proposed solution to carbon leakage, it must be assumed to affect the decisions (such as investment and operation) that the criteria are designed to assess.
• Analysis of 159 UK sub-sector activities shows that as the share of the cap allocated for free declines from 80% in 2013 to 30% by 2020, the number of activities qualifying as 'at risk' under Criteria I and II increases over time.
• Calculating costs after free allocation offers several benefits: it provides visibility for future measures, allows for learning during implementation, reduces economic distortions associated with repeated free allocations, and encourages industrial sectors to support international climate policy cooperation.

APA

Neuhoff, K. (2009). Interpreting the rules for EU ETS Phase III. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/interpreting-the-rules-for-eu-ets-phase-iii.pdf

Chicago

Neuhoff, Karsten. Interpreting the rules for EU ETS Phase III. Climate Strategies, 2009. https://climatestrategies.org/wp-content/uploads/2014/11/interpreting-the-rules-for-eu-ets-phase-iii.pdf.

Wikipedia

{{cite report |last1=Neuhoff |first1=Karsten |title=Interpreting the rules for EU ETS Phase III |publisher=Climate Strategies |date=24 March 2009 |url=https://climatestrategies.org/wp-content/uploads/2014/11/interpreting-the-rules-for-eu-ets-phase-iii.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{neuhoff2009interpreting, author = {Neuhoff, Karsten}, title = {{Interpreting the rules for EU ETS Phase III}}, institution = {Climate Strategies}, year = {2009}, month = mar, url = {https://climatestrategies.org/wp-content/uploads/2014/11/interpreting-the-rules-for-eu-ets-phase-iii.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }