EU industry and the 'carbon leakage' threat

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Fears that tighter controls on CO2 emissions in Europe will drive factories to relocate abroad has led the EU to grant sweeping exemptions for industries deemed to be at risk. Aluminium, steel, iron and cement producers are likely to benefit from the preferential regime.

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Overview

In January 2008, the European Commission proposed to revise the EU Emissions Trading Scheme (EU ETS; see EurActiv LinksDossier) for the period 2013-2020, setting out the EU's main instrument to meet its objective of reducing greenhouse gas emissions by 20% by 2020 compared to 1990 levels.

The proposal, part of a wider climate and energy 'package' of legislation, suggested capping emissions to 21% below 2005 levels by 2020 and expanding the scheme to include more industrial sectors.

Under the revised scheme, electricity producers would need to buy 100% of their CO2 emission permits at auction by 2020, for example. The Commission believes this would cause electricity prices to rise by 10-15%.

But heavy industry, including the cement, steel, aluminium and chemical sectors, argues that a tightened ETS would inflate costs to such an extent that they would be forced to move their factories and jobs beyond the EU's borders, leading to a 'leakage' of CO2 emissions without any environmental benefits.

European cement producers, for example, warned that production could be wiped out in the EU completely. "At current CO2 prices of €25 per tonne, approximately 80% of clinker production will be offshored if no free allowances are allocated."

Such concerns have been aired particularly vociferously in Germany, which has the largest industrial base in Europe. Morevover, countries such as Poland, which rely heavily on coal for their power production, have claimed that the revised ETS would force coal-fired power stations to shut down, leading to rises in electricity prices of more than 100%.

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