The expected impact of raising the EU's CO2 reduction effort on carbon-intensive industries will be evaluated in a Commission paper, scheduled to be presented on 26 May.
The report is expected to make the case for raising the EU's CO2 reduction target for 2020 from 20% to 30%, arguing that the threat of industries moving abroad is limited (EurActiv 03/05/10).
The move comes as Europe tries to regain the upper hand in international climate talks, which collapsed last year at a UN summit in Copenhagen.
The latest draft, seen by EurActiv, says that as a result of the recession, "the potential of carbon leakage with a 20% target in current circumstances is much lower" than assumed in 2008 when the EU's climate and energy policies were approved.
"We should not hide that the recession has significantly weakened the price signal [for carbon dioxide]," said Connie Hedegaard, the EU's climate action commissioner, announcing an 11.6% drop in emissions for 2009 earlier this week.
The Commission adds that raising the target unilaterally to 30% would have a "limited" additional impact on the EU's energy-intensive industries if preventive measures already foreseen were put in place.
It believes raising the EU's target to 30% would encourage reluctant countries such as China and India to sign up to a binding international climate treaty.
The Commission estimates that the additional production losses linked to moving to 30% compared to the 20% legislation would be relatively minor – in the range of 1% – for ferrous and non-ferrous metals, chemical products and other energy-intensive sectors.
The draft document argues that the "most obvious" way to avoid a competitive disadvantage for European companies is to maintain the level of free allowances currently foreseen for certain industrial sectors. It sees this as the most viable option to counter calls for carbon tariffs to be introduced at the EU's borders, arguing that tariffs raise major trade policy issues.
France has been actively campaigning for such border adjustment measures. Paris says they are only intended to restore fair competition conditions with countries such as China, arguing that the money raised could even be spent on supporting low-carbon technologies in the developing world (EurActiv 18/05/10).
Greens study says carbon leakage 'overstated'
In the meantime, a study launched today (20 May) by the Greens in the European Parliament argues that the threat of Europe's energy intensive industries fleeing ambitious climate policies has been "seriously overstated".
The study, compiled by Climate Strategies, a research organisation, argues that only 13 of the 164 sectors identified by the European Commission as vulnerable to "carbon leakage" are likely to relocate abroad.
The usual suspects include steel, cement, aluminium, paper and pulp, some chemical sub-sectors and refineries.
The criteria used by the EU executive to identify vulnerable sectors was based on trade intensity and the share of carbon costs in the sector's gross value added. The data was supplemented with qualitative assessments but the hard data was not up to the standards, the study argues.
The paper criticises the approach as faulty because the rules have been rushed through and based on simplified policy scenarios. Moreover, the calculations were based on low thresholds that were not supported by evidence, it added.
The study argues that a more detailed qualitative analysis of a small set of sectors with high-cost impacts would have produced more telling results.
Applying such a method, the researchers found that policy responses should differ sector-by-sector and that prescribing free allowances to each trade-intensive sector, as the Commission has chosen to do, was not the right answer.
In fact, the complex procedures for setting benchmarks for free allocation to the 164 sectors will only give rise to industry demands for further measures to address competitiveness, such as border adjustment, the study argues. Moreover, it has been well-documented that free allocation dampens price signals and creates windfall profits for companies, the study adds.
"It is high time that the smokescreen of 'carbon leakage' is more rigorously assessed by EU policymakers," said Green MEP Yannick Jadot (France). "The spectre of carbon leakage cannot be allowed to have such a determining effect on EU climate policy and legislation given the lack of evidence for leakage beyond a handful of sectors."