Significant changes have been made to the provisional Phase IV carbon leakage list, which was released on May 8th. The revised list now includes only 44 sectors and sub-sectors, a substantial reduction from the previous Phase III list that encompassed over 170 areas. This implies that companies in affected sectors will face significant cost increases in Phase IV. If your sector or sub-sector did not make it onto the list, your free allocation will be significantly impacted.
Understanding Carbon Leakage
Carbon leakage refers to the situation where businesses in certain industry sectors or sub-sectors transfer production to countries with less stringent emission constraints due to cost implications related to climate policies. For instance, a company captured by the EU ETS in Spain may choose to relocate production to North Africa to avoid high carbon costs. This development not only results in job losses within the EU but also risks increasing emissions if production shifts to less efficient facilities, potentially offsetting the EU's emission reduction efforts. Free allocation is provided to address competitiveness concerns by reducing the effective carbon costs for energy-intensive sectors that are unable to pass these costs to customers through higher prices.
Significance of the Changes in Phase IV Carbon Leakage List
A total of 134 sectors and sub-sectors have been removed from the Phase IV leakage list. Companies excluded from the carbon leakage list can expect their free allocations to decrease from 100% of their calculated allocation based on the applicable benchmark to a maximum of 30% in 2021. This allocation will steadily decline to 0% over the second half of Phase IV (2026-2030).
Furthermore, 28 sectors and sub-sectors that have been removed from the leakage list for Phase IV are eligible for a second-level assessment. They face a tight deadline to apply to the European Commission, via their Member States, for this assessment.
With significantly higher EUA prices, which have tripled since the lows of 2017, companies dropping off the carbon leakage list will encounter substantially higher compliance costs.
Accessing Information on Carbon Leakage List Status
Redshaw Advisors has prepared a complimentary guide detailing how companies within the EU ETS will be impacted by the revised carbon leakage list and the necessary actions they must take within specified timelines. To obtain a copy of this guide, please reach out to us.
At Redshaw Advisors, we specialize in assisting companies in understanding and managing the risks associated with the EU ETS. For a discussion with our award-winning consultancy team, please contact us at +44 203 637 1055 or email us at info@redshawadvisors.com.
