Carbon Leakage and the EU ETS

The document examines 'carbon leakage'—where EU production moves to non-EU territories lacking carbon pricing—and critiques the European Commission's broad identification of 'at risk' sectors. While the EU ETS aims to stimulate low-carbon investment, the author argues that excessive free allocation of allowances may undermine the carbon price signal and encourage lobbying. The briefing suggests a more targeted screening process for high-emitters and proposes a portfolio of measures, including border adjustments based on CO2 emissions and sectoral agreements, to maintain competitiveness without sacrificing climate goals.

• Carbon leakage occurs when emission reductions in the EU are offset by production activities moving to non-EU territories that do not have equivalent carbon pricing policies, potentially undermining global emission reduction efforts.
• Three specific energy-intensive sectors are identified as being particularly at risk of carbon leakage: aluminium, iron and steel, and cement production.
• The European Commission's identification process for 'at risk' sectors is criticized for being too broad, with 77% of industry sectors qualifying for benchmarked free allocation based on generous trade intensity thresholds and assumptions that sectors must auction all permits.
• Free allocation of allowances may reduce the incentive for companies to innovate or invest in low-carbon technologies and could allow firms to increase profits by importing from non-EU regions.
• To prevent the offshoring of production, the author suggests implementing a 'closure rule' where free allowances are revoked if a company moves its operations abroad.
• Border adjustments are proposed as an alternative to free allocation, but the author warns they must be based on CO2 emissions rather than country of origin to avoid being viewed as protectionist trade measures.

APA

Droege, S. (2009). Carbon Leakage and the EU ETS. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/leakage-issues-and-options-brief-oct09-final.pdf

Chicago

Droege, Susanne. Carbon Leakage and the EU ETS. Climate Strategies, 2009. https://climatestrategies.org/wp-content/uploads/2014/11/leakage-issues-and-options-brief-oct09-final.pdf.

Wikipedia

{{cite report |last1=Droege |first1=Susanne |title=Carbon Leakage and the EU ETS |publisher=Climate Strategies |date=5 October 2009 |url=https://climatestrategies.org/wp-content/uploads/2014/11/leakage-issues-and-options-brief-oct09-final.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{droege2009carbon, author = {Droege, Susanne}, title = {{Carbon Leakage and the EU ETS}}, institution = {Climate Strategies}, year = {2009}, month = oct, url = {https://climatestrategies.org/wp-content/uploads/2014/11/leakage-issues-and-options-brief-oct09-final.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }