At the beginning of this month, the European Commission (the Commission) held its latest stakeholders meeting to determine which industries covered by the EU ETS are most at risk of carbon leakage. This is an area that is currently creating significant controversy in the EU.

Under the revised EU ETS Directive the Commission, assisted by expert representatives from the EU Member States, has been charged with producing a list of sectors or sub-sectors deemed to be most at risk of losing business to companies based outside the EU. Sectors deemed to be at risk will have 100 per cent of allowances allocated free of charge in Phase III. This contrasts to other sectors which will either receive no free allowances or a decreasing amount of free allowances each year from 2013 to 2020. Under the current timetable, the list of affected sectors is due to be adopted by December 2009.

The task of balancing the desire to keep European industry competitive with the need to tackle climate change has inevitably attracted criticism from a number of sources. In particular, questions have been raised over the accuracy of the data used by the Commission to carry out its analysis and its assumption that sectors are subject to 100 per cent auctioning of allowances in performing their analysis of carbon leakage which, it is feared, will lead to the exclusion of certain sectors from free allowances and windfall profits for others. More generally, there are concerns that the EU should wait until after the Copenhagen Climate Summit in December 2009 in order to take account of measures enacted by other countries, especially the USA.

The Commission sought to appease its critics by clarifying that under the current rules it is possible to supplement the list of affected sectors annually and by stressing that there is provision for a further review in view of any agreement which may be reached in Copenhagen. As for its methodology, the Commission defended the decision to use 100 per cent free allocation as the basis for its analysis, as this is based on benchmarking of the most efficient installations. At this stage, argued the Commission, as the benchmarking process has yet to be concluded it is not feasible for it to make any further detailed calculations. Various parties have indicated that they may seek to bring a legal action to challenge the Commission’s list of sectors subject to carbon leakage. Though there are grounds for such claims to be brought, the judicial procedures would be likely to be lengthy and not all parties, for example environmental organisations, would be able to establish grounds to bring an action. Further, the deadlines for bringing such claims are highly restrictive.

Despite the current controversy, the stakeholder consultation remains underway and the Commission is expected to send the provisional list of sectors to the European Parliament for its scrutiny by September 2009.