The Phantom Leakage

The document analyzes how free emission allowances under the EU ETS led to up to 50 billion euros in windfall profits for energy-intensive industries between 2008 and 2019. It challenges the 'carbon leakage' justification for these allowances, noting a lack of evidence for industrial relocation. The author recommends transitioning to full auctioning of permits and utilizing the resulting revenues for climate innovation and a just transition.

• Energy-intensive companies in the United Kingdom and 18 European countries generated up to 50 billion euros in windfall profits from the EU carbon market between 2008 and 2019.
• The iron and steel, cement, petrochemicals, and refineries sectors achieved the highest gains, with the largest shares of profits occurring in Germany, the United Kingdom, France, Italy, and Spain.
• Windfall profits were generated through three primary mechanisms: the surplus of free allowances, the use of cheaper international offsets for compliance, and the passing of carbon costs through to product prices.
• Carbon cost pass-through was the most significant source of profit, contributing between 26 and 46 billion euros, particularly in the iron and steel sector (12-16 billion euros), refineries (7-12 billion euros), and cement (3-7 billion euros).
• The document asserts that 'carbon leakage'—the relocation of production to countries with weaker climate policies—is a myth, citing research that shows no evidence of relocation due to the EU ETS.
• Free allocation is described as a market failure that reduces the incentive for industries to decarbonize; for example, industrial emissions from steel, cement, and chemicals have stagnated with less than 0.4% annual reduction since 2013, whereas power sector emissions dropped by over 33% between 2012 and 2019.
• Between 2021 and 2030, the projected distribution of 6.5 billion free emission allowances could result in a pollution subsidy exceeding 300 billion euros.
• The author recommends replacing free allocation with a Carbon Border Adjustment Mechanism (CBAM) and full auctioning, ensuring 100% of revenues are invested in climate action, just transition, and international climate finance.

APA

Carbon Market Watch (2021). The Phantom Leakage. https://carbonmarketwatch.org/wp-content/uploads/2021/06/Phantom_leakage_WEB.pdf

Chicago

Carbon Market Watch. The Phantom Leakage. 2021. https://carbonmarketwatch.org/wp-content/uploads/2021/06/Phantom_leakage_WEB.pdf.

Wikipedia

{{cite report |author=Carbon Market Watch |title=The Phantom Leakage |date=June 2021 |url=https://carbonmarketwatch.org/wp-content/uploads/2021/06/Phantom_leakage_WEB.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{carbonmarketwatch2021phantom, author = {{Carbon Market Watch}}, title = {{The Phantom Leakage}}, institution = {Carbon Market Watch}, year = {2021}, month = jun, url = {https://carbonmarketwatch.org/wp-content/uploads/2021/06/Phantom_leakage_WEB.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }