Episode 25: Carbon Leakage

In this episode of podcast, I have talked about "Carbon Leakage."  Carbon leakage is central to the discussion on climate policy, given the confluence of issues that are currently being debated, including the 2030 Energy and Climate Framework and the review of the EU carbon leakage. Carbon leakage is the result of asymmetrical carbon policies, especially carbon pricing, and the resulting carbon cost, which affects the international competitive position of some EU industry and could displace production and/or investment, and the emissions of the activities displaced. 
Topics:

• What is Carbon Leakage?
• Impacts
• Forms of Carbon Leakage
• Channels for Carbon Leakage
• Cause 
• Objectives
• Carbon Prices and costs
• Asymmetrical Carbon Policies
• Preventing Carbon Leakage
• Carbon Tax Credits
• Free allowance allocation

 Additional Notes:
 EU ETS leakage list criteria:
 If an activity fulfills any of the following three thresholds, they are added to the leakage list: 

•  Direct and indirect costs increase production costs by at least 5% of gross value added and trade intensity (calculated as the value of imports plus exports over annual turnover plus imports) is over 10%, 
•  Direct and indirect costs increase production costs by at least 30%
•  Trade intensity is over 30%. 

 If a sector has borderline values on the quantitative criteria, then the following qualitative criteria can be considered: 

•  Emissions levels and electricity consumption reduction potential of individual installations in the sector, 
•  Current and projected market characteristics and 
•  Profit margins as an indicator of long-term investment or relocation decisions 

The focal point of the approach to leakage in the EU ETS is the leakage list. Sectors and activities on this list receive a larger proportion of free allocation (with respect to their compliance obligations) than sectors that are not on the list. If an installation is among the most carbon-efficient entities in the sector and production has not increased beyond production in the reference years (the three most-recent years for which data are available), that installation receives full free allocation (if we do not take the cross-sectoral correction factor into account). 
The Quebec Cap-and-Trade scheme is characterized by its degree of political maneuverability. The sectors eligible for free allowances and the amount of free allocation are not set in stone and can be reviewed by the Ministry if and when it is deemed necessary. The auction calendar is also subject to political decisions. Two additional exceptional issues should be noted: 

•  Electricity imported from other cap-and-trade systems that are not linked to Quebec’s system is also eligible for free allocation. 
•  From 2015 to 2020, free allocation decreases annually, determined by an emissions-intensity target that also decreases annually. Different industrial activities will see different levels of decrease. 

 New Zealand ETS :
 Starting in 2008 with the forestry sector, the New Zealand ETS has gradually expanded. In 2010energy and industry joined and in 2013 synthetic gases and waste sectors were included. Agriculture has had a mandatory reporting obligation for biological on-farm emissions from 2012 and was previously legislated to have surrendered obligations for these emissions from 2015, but this has been placed on hold indefinitely. 

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