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PROPOSED MODIFICATIONS TO THE EMISSIONS TRADING DIRECTIVE : POCKLINGTON :: :: : (2008) 20 ELM 137
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Articles 10a(4) and (5) of the proposed directive give is issued free of charge. Likewise, Recital 19 states ‘allocate
an indication of the maximum amount of allowances to be allowances free of charge up to 100 per cent to sectors
subject to free allocation, but apart from a reference to or sub-sectors meeting the relevant criteria’.
‘harmonised Community-wide rules (benchmarks)’ in These options are covered in Recitals 19 and 20 and
Recital 18, there are few clues as to the methodology to Article 10b. The latter states that following the outcome
be used – a critical factor to those involved. The cryptic of the international negotiations, the Commission will
statement in Article 10a(4) that ‘a correction factor shall submit a report on their potential impact on the EIIs to
be applied where necessary’ adds further to the the Parliament and the Council, along with appropriate
uncertainty. proposals that may include:
Uncertainty extends even to those industries in the
100 per cent auction sector. Since the transitional sector • adjusting the proportion of allowances received free
arrangements have not yet been confirmed, there is a lack of charge by those sectors or sub-sectors under
of clarity as to the total number of allowances that will be Article 10a
issued free, and this has an impact on the carbon market, • inclusion in the Community scheme of importers of
potentially increasing volatility and affecting the products produced by the sectors or sub-sectors
purchasing strategies of those subject to 100 per cent determined in accordance with Article 10a.
auctioning.
The presentation of these options as alternatives in the
Carbon leakage explanatory memorandum and in the preamble suggests
that the absence of the word ‘or’ between the sub-
Phase III of the EU ETS will require substantially greater paragraphs does not imply that they are to be read
GHG reductions than earlier phases. Until industry in third together.
countries is subject to comparable constraints, there will Sectors at risk will be identified by the Commission
be a real risk of ‘carbon leakage’ from energy intensive ‘at the latest by 30 June 2010 and every three years
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industries within Europe. (The more precise term is ‘carbon thereafter’, and from 2013 and in each subsequent year,
migration’ since it describes the migration of carbon allowances are allocated free of change ‘up to 100 per
emissions associated with a shift in production). Within cent’ of the quantity determined in paras 2–6. 40
the proposed directive, ‘carbon leakage’ is defined by the The Commission’s identification of these sectors will
Commission as ‘relocation of greenhouse gas emitting take into account: the ability of the sector or sub-sector
activities from the EU to third countries and thereby to pass on the cost of the required allowances in product
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increasing global emissions’. It should be noted that a prices without significant loss of market share to less
definition relating to the physical post-capture leakage of carbon-efficient installations outside the Community,
CO from storage sites is contained in the proposed subject to:
2
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directive on carbon capture and storage in which
‘“leakage” means any release of CO from the storage • the extent to which auctioning would lead to a
2
complex’. substantial increase in production cost
The proposed directive seeks to address this through • the extent to which it is possible for individual
transitional arrangements which would either make an installations in the sector to reduce emission levels
upward adjustment of free allowances to installations at for instance on the basis of the most efficient
risk, or apply an ‘effective carbon equalisation system’ on techniques
products brought into the Community that are not subject • the market structure, relevant geographic and product
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to carbon-limiting controls. These options are shrouded market, the exposure of the sectors to international
in uncertainty and only the former is covered by any competition
articles in the proposed directive. Furthermore, the • the effect of climate change and energy policies
wording used in the Commission’s document needs to be implemented, or expected to be implemented outside
read carefully to expose the subtleties in meaning. the EU in the sectors concerned.

Free allocation Determining whether an industry can pass on the
opportunity costs arising from auctioning is difficult to
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The Explanatory Memorandum of the Proposal refers to define, but measures which might be used include inter
the energy-intensive industries, (EIIs), receiving up to 100 alia: estimates of lost sales resulting from the increased
per cent of allowances free of charge. That is, their total carbon price; and the impact on the profitability of the
allocation is not changed, only the percentage of it that installations concerned.
This issue of free allocation may also be an important
consideration for some industries not directly covered by

35 Explanatory Memorandum p 7.
36 Proposal for a Directive amending Directive 2003/87/EC (n 2) art
3(5) ref 8. 39 Proposal for a Directive amending Directive 2003/87/EC (n 3) art
37 Explanatory Memorandum p 8. 10a (9).
38 Proposal for a Directive amending Directive 2003/87/EC (n 2). 40 ibid art 10a (8).

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