As the ETS is strengthened in the future, the risk of carbon leakage becomes imminent, especially to the industries deemed at the highest risk of leakage such as the fertilizer industry. Going forward, it should be a key concern that the scarce free allowances are allocated most effectively to prevent carbon leakage. Instead of spreading the layer of compensation thinly through the application of e.g. cross-sectoral correction factors, compensation should be targeted to the industries at the highest risk of leakage.
Moreover, we argue that the use of estimate of industries’ potential to pass through costs to consumers to predict leakage risk should be treated with much caution.
Today, Managing Economist Martin Bo Hansen presented the results at an event in the European Parliament on ETS: Risks and Solutions for the fertilizer industry.