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Executive Summary
This report intends to bring the reader up to speed on the carbon leakage
discussions and especially the revision of the first carbon leakage
list in 2014.
First, the report summarises the legal background of the carbon leakage list, the methodology behind the calculations,
the assumptions used for the first list and the results. Second, upcoming revision is highlighted by analysing the necessary
legislative steps, the potential changes and the timeline of the revision. As a third point, the impact of a revision on
fundamental volumes as well as the traded market balance is shown by utilising three different scenarios.
Key points:
It is legally unclear whether the carbon price assumptions (30/tonne) made for the determination of the first list can
be changed when revising the list.
The auctioning factor, the emission factor for electricity and countries to be considered as non-third countries are
assumptions that should be based on available data of the three most recent years.
A trimmed carbon leakage list would decrease the free allocation volumes, but at the same time increase the
auctioning volumes.
In the traded market, a trimmed list would have a counterintuitive impact, as
the traded market balance would be longer;
the accumulated traded market balance would consequently also be longer; and
the banked volumes would decrease.
These effects are observable because of three reasons:
1. Additional demand entering the market due to less free allocation is partly covered through additional liquidation of
banked allowances.
2. The increased auction volumes exceed the additional demand which is covered via the market by far.
3. Auction supply is entering the market for sure and cannot directly end up as banked volumes as it might be if industry
is over-allocated.
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Introduction
Carbon leakage describes the increase of emissions in
one country as a result of an emissions reduction due to
the climate policy by a second country. Since industry in
the second country is not subject to comparable carbon
constraints, production costs for the industry, which is
affected by the climate legislation in the first country, might
be higher. If companies are unable to pass on these
additional costs to their customers without losing a significant
market share, the climate legislation results in an economic
disadvantage and no emission reductions when considering
both countries together.
To address this potential competitive disadvantage for
industrial installations covered by the EU emissions
trading system (EU ETS) and to prevent the relocation of
installations to countries outside the EU, carbon leakage
exposed production receives a higher share of free allocation
in the third trading period.
The European Commission adopted in 2009 a list on
which all sectors and sub-sectors deemed to be exposed
to a significant risk of carbon leakage are listed. In order to
Technicalities of the
Carbon Leakage List
Legal Base, Criteria & Methodology
The carbon leakage issue, especially the methodology of
the determination, is mainly handled in Article 10(a) of the
ETS Directive (Directive 2003/87/EC).
Paragraph 13
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Paragraph 14
Direct Costs
Is calculated by multiplying the direct emissions from the sector/subsector in question with the auctioning
factor and the carbon price.
Formula
Direct Cost=Direct Emissions*Auctioning Factor*Carbon Price
Indirect Cost
Is calculated by multiplying electricity consumption of the sector/subsector in question for own use with an
emissions factor for electricity and the carbon price.
Formula
Indirect Cost = Electricity Consumption*Emission Factor*Carbon Price
Carbon Costs
Is the sum of Direct and Indirect Costs calculated as a proportion of gross value added.
Formula
Defined as the ratio between the total value of exports to third countries plus the value of imports from third
countries and the total size for the Community (annual turnover + total imports from third countries).
Formula
Trade Indesity = Imports+Exports
Turnover+Imports
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Legislative Procedure
According to the commission roadmap (which is
published online), the appropriate proportionate legislative
instrument to determine the new list is a Commission
Decision. Article 10a (13) of the ETS Directive regulates
the procedure for such a Commission Decision related
to the carbon leakage list by stating that amending the
list and producing a new one is done via the Comitology
procedure.
Table 3 - Definitions
Term
Definition
Auctioning Factor
The auctioning factor is the share of direct emissions for which a sector needs to buy allowances in the
market if it was not exposed to a significant risk of carbon leakage
Commission Decision
Decisions are (a) EU laws relating to specific cases, (b) addressed to specific parties (unlike
regulations) and (c) full legally binding. Decisions can either come from the EU Council or, as in this case,
from the commission
Comitology
Comitology refers to a legislative procedure in which the European Parliament and the Council delegate
legislative power to the commission. In the procedure, the commission introduces a proposal for a law in
a Comitology Committee (chaired by the commission). In terms of climate legislation, this committee is the
Climate Change Committee (CCC). The committee is composed of member state (MS) representatives and
has to adopt the proposal of the commission by qualified majority. After the CCC adopts the measure, the
parliament has a three-month scrutiny period to veto the proposal.
Qualified Majority
The voting system in the European Council and in Comitology Committees is a weighted voting system
based on the populations of MS. In total, 352 votes are distributed among MS and 260 votes are necessary
to reach a qualified majority.
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contact:
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Timeline
As mentioned before, the deadline for handing in
contributions for the online stakeholder consultation is
on 30 August 2013. The commission has announced
that they intend to hold additional stakeholder sessions
and discussions based on preliminary results in the
fourth quarter of 2013 in the form of bilateral and
multilateral meetings.
After consulting with the stakeholders, the commission
will draft a final decision and launch an inter-service
consultation within the commission to enable every
Directorate General (DG) to express their opinion.
Once the inter-serve consultation is finished, the
commission will introduce the new list to the CCC for
voting. If the CCC adopts the new list, the parliament
has a three-month scrutiny period to object.
At the moment, it is not possible to predict a timeframe
in which the abovementioned events take place
since there are too many uncertainties. However, the
commission has always confirmed that the new list will be
ready during 2014.
2016
2017
2018
2019
Total
747.1
730.3
713.6
697.0
680.6
Auctions
Total
938.7
947.1
955.4
963.8
973.9
Auctions
Total
665.7
631.5
597.9
565.4
533.4
[m tonnes]
-81.4
-98.8
-115.7
-131.7
-147.2
[%]
-11%
-14%
-16%
-19%
-22%
Total
1020.1
1045.9
1071.1
1095.5
1121.1
[m tonnes]
+81.4
+98.8
+115.7
+131.7
+147.2
[%]
+9%
+10%
+12%
+14%
+15%
Auctions
Total
559.9
506.2
453.6
403.3
354.1
[m tonnes]
-187.3
-224.1
-260.0
-293.7
-326.5
[%]
-25%
-31%
-36%
-42%
-48%
Total
1126.0
1171.2
1215.4
1257.5
1300.4
[m tonnes]
+187.3
+224.1
+260.0
+293.7
+326.5
[%]
+20%
+24%
+27%
+30%
+34%
contact:
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400
200
0
2014
2015
2016
2017
2018
2019
150
1500
100
1000
50
500
-500
-50
-100
2014
2015
2016
2017
2018
2019
contact:
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-1000
Graph 1 - Yearly Traded Positions and Accumulated Banked Positions of the Different Carbon
Leakage List Scenarios; Source: Tschach Solutions
Conclusion
The current carbon leakage list, which was initially adopted in
December 2009, is up for a review in 2014. The commission
is legally obliged to adopt a new list for 2015-2019.
As outlined in this report, the criteria for carbon-leakage
exposure will stay the same for the second list. However,
adjusted input factors (expected average carbon price,
auctioning factor, emission factor for electricity and countries
to be considered as non-third countries) could change the
composition of the list. One of the key questions in regards
to input factors is whether it is legally feasible to change
the expected average carbon price that is used for the
calculations. The latest statement from the commission on
this issue indicates that a change might not be possible.
contact:
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10
Disclaimer
The graphs, tables and data provided in this report were
prepared by Tschach Solutions. The report is meant to
provide additional information to the professionals in the
carbon and power market. Tschach Solutions obtains
data and information only from sources Tschach Solutions
considers reliable, but Tschach Solutions cannot make
any representation or warranty, express or implied, to the
accuracy or completeness of the data and information
provided.
Estimates cannot provide exact predictions and can prove to
be misleading. Thus, any estimates or predictions provided
in this report are merely opinions and views of Tschach
Solutions and might change without notice, and Tschach
Solutions has no obligation to update the information
provided in the report.
The information provided in the report is no advice or
recommendation for any trading decision. All users of
the report should make up their mind using a variety of
information sources.
This report is produced by Tschach Solutions and published
on a subscription basis. Neither the report nor any of the
information provided is issued at the request of any client of
Tschach Solutions.
contact:
Tschach Solutions GmbH
Bachstrasse 43
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+49 (0)721 - 16 08 96 30
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Copyright
Copyright 2013 by Tschach Solutions
All rights reserved by Tschach Solutions. No part of this
report shall be forwarded or otherwise redistributed,
scanned electronically, photocopied, reproduced etc.
without the written authorization of Tschach Solutions.
Contact
Tschach Solutions GmbH
Bachstrasse 43
76185 Karlsruhe
Germany
Tel: +49 / 721 16 08 96 30
e-mail: info@tschach-solutions.com