Table of contents 1.Introduction 1.1. Context and purpose of the evaluation 1.1.1. The EU ETS 1.1.2. The 2012 ETS Guidelines (2013-2020) 1.1.3. The revised ETS Directive (2021-2030) 1.1.4. Clean Energy Package 1.1.5. The Green Deal Communication 1.1.6. The New Industrial Strategy for Europe 1.2. Scope of the evaluation 2.Background to the intervention 2.1. Description of the intervention and its objectives 2.1.1. General objective 2.1.2. Specific objectives 2.1.3. Intervention logic 2.2. Baseline and points of comparison 3.Implementation / State of Play 3.1. Description of the current situation

4.Method 4.1. Short description of data collection and assessment methods 4.2. Limitations and robustness of findings 5.Analysis and answers to the evaluation questions 5.1.Overview of the Evaluation questions 5.2. Relevance 5.2.1. Implementation of ETS costs compensation schemes over the third trading period Level and evolution of electricity prices Industry structure Trade exchanges 5.2.2. Evolution of the legal and economic frameworks over the third trading period 5.2.3. Conclusion 5.3. Effectiveness 5.3.1. Minimisation of carbon leakage 5.3.2. Prevention of competition distortions 5.3.3. Preservation of the incentive for cost effective decarbonisation of the economy 5.3.4. Horizontal issues 5.3.5. Conclusions 5.4. Efficiency 5.5. EU added value

5.6. Coherence 5.6.1. Coherence with the objectives of the Green Deal Communication and the New Industrial Strategy for Europe Communication 5.6.2. Coherence with other interventions 6.Conclusions Appendix A Literature review on carbon leakage 1. Evidence for carbon leakage – short-term aspects 2. Evidence for carbon leakage – long-term aspects 3. Carbon leakage rates at higher CO2 prices 4. Carbon pricing outside the EU Appendix 2 - Findings about EU electricity prices Table of Figures Figure 1: Overall intervention logic Figure 2: EU ETS CO2 Emissions and annual cap vs. EUA prices Figure 3: EUA closing prices Figure 4: Indirect ETS costs compensation schemes Figure 5: Electricity prices including all taxes and levies in €/KWh with all taxes and levies for large industrial consumers - year 2017

Figure 6: Evolution of electricity prices including all taxes and levies for Member States that have implemented a compensation scheme in 2013 - €/KWh Figure 7: Composition of small (IB) and large (IF) industrial prices in 2017 Figure 8: Electricity consumption over GVA Figure 9: GVA of eligible sector under the 2012 ETS Guidelines over total Member States industrial GVA- year 2016 Figure 10: Evolution of the carbon prices in the EU ETS market (2015-2019) Figure 11: Benchmark of carbon price projections (2021-2030) Figure 12: European, US, Chinese and Japanese retail electricity prices for industry Figure 13: Total greenhouse gas emissions (including international aviation and indirect CO2, excluding LULUCF) trend, EU-28, 1990–2017 (Index 1990 = 100) Figure 14: Day-ahead price convergence in Europe – 2008–2017 (% of hours) Figure 15: overview of replies to question 10 “how do administrative costs incurred by the aid application compare with the actual amount of compensation received?” Figure 16: overview of replies to question 14 of the public consultation on the usefulness of having ETS Guidelines in place Figure 17: Summary map of regional, national and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration as of 2018 Figure 18: Composition of EU electricity price Figure 19: Electricity prices including all taxes and levies for Member States that have implemented a compensation at a later stage during phase 3 - €/KWh Figure 20: Average electricity prices including all taxes and levies for Member States that have not implemented a compensation schemes - €/KWh Figure 21a and 21b: Comparison of producer price index and electricity price (including all taxes and levies) changes - 2009-2013 (on top) and 2013-2017 (below) Figure 22: Financial support to interruptible load schemes in some EU Member States Figure 23: Composition of taxes and levies on prices for small (IB) and large (IF) industrial consumers (2008-2017) Figure 24: Industry GVA as a percentage of GDP Figure 25: Percentage of exchanges with the rest of the EU for industrial goods - year 2016





Glossary Term or acronym Meaning or definition CEP Clean Energy Package, CCS Carbon Capture and Storage CWE Central-Western Europe EEA European Economic Area EFTA European Free Trade Association EED II Energy Efficiency Directive 2018/2002/EU EPBD Energy Performance of Buildings Directive 2018/844/EU ETS Greenhouse gas emission trading scheme EU European Union EUA European Union Allowances GDP Gross domestic product GHG Greenhouse gas GVA Gross value added JRC Joint Research Centre MSR Market Stability Reserve NACE Statistical classification of economic activities in the European Community (NACE = Nomenclature statistiques des Activités économiques dans la Communauté Européenne) NGO Non-governmental Organisations PPAs Power Purchase Agreements RED II Renewable Energy Directive 2018/2001/EU TFEU Treaty on the functioning of the European Union 1.Introduction 1.1.Context and purpose of the evaluation 1.1.1.The EU ETS The European Union is at the forefront of the fight against climate change. It has set ambitious energy and climate policies over the last decades. In 2005, the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) was introduced to reduce greenhouse gas (“GHG”) emissions in a cost-effective way and combat climate change. It was the first international system for trading GHG emission allowances and it is covering more than 11 000 power stations and industrial plants in 31 countries (28 EU Member States and 3 EEA/EFTA States), as well as airlines. It covers around 45% of the EU’s emissions. The EU ETS is a “cap and trade” system: a cap is set on the total amount of greenhouse gas that can be emitted by factories, power plants and other installations in the system. The cap is reduced annually over time so that total emissions fall: in 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005, and by 2030 43% lower. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. After each year a company must surrender enough allowances to cover all its emissions, otherwise fines are imposed. Directive 2009/29/EC amending Directive 2003/87/EC (“ETS Directive”) improved and extended the EU ETS in the third trading period 2013-2020 (“Phase 3”). Phase 3 of the EU ETS is based on a stricter and single EU-wide cap. The allocation of allowances are made on a transitional fully harmonised EU-wide basis and wider auctioning of allowances have been progressively introduced. Participation in the EU ETS is mandatory for companies operating in the sectors covered. The EU ETS thus creates a carbon price signal for businesses to reduce GHG emissions that contribute to climate change. There are two ways the carbon price affects companies covered by the EU ETS. On the one hand, these companies have to buy CO2 certificates corresponding to their own industrial emissions (so-called direct ETS costs). Companies also pay more for the electricity which they consume (so-called indirect ETS costs). Indirect ETS costs stem from the fact that the electricity producers pass the carbon price to consumers via the electricity price. The ETS Directive provides for the protection of EU sectors and sub-sectors “at significant risk of carbon leakage” due to CO2 costs resulting from the EU ETS. Carbon leakage refers to a situation where a unilateral climate regulation in a certain jurisdiction (e.g. the EU ETS) leads to a transfer of production to other jurisdictions that have less stringent climate regulations on GHG. It may result in undesirable environmental and economic consequences, namely a shift of production towards other regions outside the EU or reduction of the European market share globally. Carbon leakage would eventually lead to an increase in global GHG emissions as a result of increased emissions outside the EU exceeding reduced emissions inside the EU. To address international competitiveness concerns of industrial sectors that are deemed to be exposed to carbon leakage, the ETS Directive set the possibility for certain sectors to receive allowances for free. The list of sectors eligible for receiving free allowances is laid down in the Carbon Leakage List. Article 10a(6) of the ETS Directive also set that Member States may adopt financial measures in favour of sectors exposed to carbon leakage risk due to indirect ETS costs passed on in electricity prices, provided that such measures comply with State aid rules. 1.1.2.The 2012 ETS Guidelines (2013-2020) Title VII, Chapter I of the Treaty on the Functioning of the European Union (“TFEU”) set the common rules on competition. In particular, Article 107§1 of the TFEU set a general prohibition principle of State aid. The next paragraphs of Article 107 of the TFEU then establish under which conditions State aid measures can be declared compatible with the internal market . To ensure that this prohibition principle is respected and that exemptions to such principle are applied equally across the EU, Article 108§1 of the TFEU requests the Commission to keep under constant review existing aid measures. Under Article 108§2 of the TFEU, the Commission has exclusive competence to assess the compatibility of an aid measure with the internal market. The Commission has discretion to choose whether it adopts for this purpose Guidelines or whether it approves the State aid granted by Member States on the basis of individual decisions on a case-by-case basis. Where the Commission adopts Guidelines, it is bound in accordance with the principle of equal treatment, to apply them to the cases described in the Guidelines alike. The Commission has adopted various State aid guidelines to explicit common principles for assessing the compatibility of aid with the internal market. These State aid guidelines are regularly reviewed over time to improve their efficiency and to respond to the European Council’s calls for less but better targeted State aid to boost the European economy. Based on the provision of Article 10a(6) of the ETS Directive, the Commission adopted in 2012 the Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012 ("2012 ETS Guidelines"). The 2012 ETS Guidelines allow Member States to compensate some electro-intensive undertakings active in a sector exposed to international trade, for part of the higher electricity costs expected to result from the EU ETS in the period 2013-2020. The Guidelines provide that Member States can grant aid only in certain sectors deemed to be exposed to carbon leakage risk due to indirect ETS costs (the list of eligible sectors is set in Annex I of the 2012 ETS Guidelines). They also provide that such aid must be limited in size (the maximum aid amount is calculated through a formula, which takes into account the aid intensity, the CO2 emission factor of the country/region; the EUA forward price, the applicable product-specific electricity consumption efficiency benchmark and the baseline output) and declining over time. In particular, the aid intensity is degressive, as the 2012 ETS Guidelines allow subsidies of up to 85% of the increase due to indirect ETS costs faced by the most efficient companies in each sector from 2013 to 2015. The aid intensity gradually falls to 75% in 2019-2020.

Article 56 of the 2012 ETS Guidelines set that “the Guidelines will be applicable until 31 December 2020. After consulting the Member States, the Commission may amend them before that date on the basis of important competition policy or environmental policy considerations or in order to take account of other Union policies or international commitments. Such amendments might in particular be necessary in the light of future international agreements in the area of climate change and future climate change’s legislation in the Union. […]”. 1.1.3.The revised ETS Directive (2021-2030) The ETS Directive has been revised for its next trading period 2021-2030 (“Phase 4”), with the adoption of Directive (EU) 2018/410 , to enable it to achieve the EU's 2030 emission reduction targets. The new ETS Directive states in its recitals that "[i]t would be desirable that Member States partially compensate, in accordance with State aid rules, certain installations in sectors or subsectors which have been determined to be exposed to a significant risk of carbon leakage because of costs related to greenhouse gas emissions passed on in electricity prices [...]." Under the revised Directive, Article 10a(6) now set that "Member States should adopt financial measures […] in favour of sectors or subsectors which are exposed to a genuine risk of carbon leakage due to significant indirect emissions costs that are actually incurred from greenhouse gas emission costs passed on in electricity prices, provided that such financial measures are in accordance with State aid rules, and in particular do not cause undue distortions of competition in the internal market. Where the amount available for such financial measures exceeds 25% of the revenues generated from the auctioning of allowances, the Member State concerned shall set out the reasons for exceeding that amount. Member States shall also seek to use no more than 25% of the revenues generated from the auctioning of allowances for the financial measures referred to in the first subparagraph. [...] Those measures shall be such as to ensure that there is adequate protection against the risk of carbon leakage, based on ex ante benchmarks for the indirect emissions of CO2 per unit of production. Those ex ante benchmarks shall be calculated for a given sector or subsector as the product of the electricity consumption per unit of production corresponding to the most efficient available technologies and of the CO2 emissions of the relevant European electricity production mix". The abovementioned provisions of the ETS Directive are based on the premise that financial support for indirect emissions costs can be highly distortive, if it is not properly targeted to sectors that are at significant risk of carbon leakage due to CO2 costs passed on in electricity prices and limited to the additional cost stemming from the EU ETS for the most energy efficient firms. Otherwise, aid would introduce economic distortions within the EU economy and have a detrimental impact on the efficiency of the EU ETS. 1.1.4.Clean Energy Package To implement the Energy Union Strategy, the “Clean Energy for All Europeans” package (also known as “Clean Energy Package, CEP”) was adopted in 2019 as a package consisting of eight legislative acts. All have been formally adopted and are in force, but Directives still need to be implemented by the EU Member States. -Electricity Market Directive 2019/944/EU and Electricity Market Regulation 2019/943/EU ACER Regulation 2019/942/EU; -Regulation on Risk-Preparedness in the Electricity Sector Regulation 2019/941/EU and Repealing the Security of Supply Directive; -Renewable Energy Directive 2018/2001/EU (RED II); -Energy Efficiency Directive 2018/2002/EU (EED II); -Energy Performance of Buildings Directive 2018/844/EU (EPBD); and -Regulation 2018/1999/EU on the Governance of the Energy Union. Under the Energy Union Strategy and the CEP, the EU has EU-wide targets for 2030 to cut CO2 emissions by at least 40% from 1990 levels, increase the share of renewable energy to at least 32% and foster energy efficiency (EE) by at least 32.5% (compared to 2007 business-as-usual projection for 2030), while increasing the interconnectivity to 15% and reducing emissions from cars, vans and trucks. 1.1.5.The Green Deal Communication On 11 December 2019, the Commission published the European Green Deal Communication, outlining the policies to achieve climate-neutrality in Europe by 2050. To deliver the European Green Deal, there is a need to rethink policies for clean energy supply across the economy, industry, production and consumption, large-scale infrastructure, transport, food and agriculture, construction, taxation and social benefits. While all of these areas for action are strongly interlinked and mutually reinforcing, careful attention will have to be paid when there are potential trade-offs between economic, environmental and social objectives. The Commission has already set out a clear vision of how to achieve climate neutrality by 2050. The Commission Proposal for a European Climate Law has also enshrined the 2050 climate neutrality objective in legislation. 1.1.6.The New Industrial Strategy for Europe On 10 March 2020, the Commission published the New Industrial Strategy for Europe Communication. The Communication stresses that the European Green Deal is Europe’s new growth strategy and that industry has a leading role to play in what is the greatest challenge and opportunity of our times. All industrial value chains, including energy-intensive sectors, will have a key role to play. They will all have to work on reducing their own carbon footprints but also accelerate the transition by providing affordable, clean technology solutions and by developing new business models. Energy-intensive industries are indispensable to Europe’s economy and are relied on by other sectors. Modernising and decarbonising energy-intensive industries must therefore be a top priority.

1.2.Scope of the evaluation In this context, the evaluation of the 2012 ETS Guidelines seeks to assess whether State aid measures implemented by Member States during Phase 3 have prevented carbon leakage (thus resulting in a higher overall level of environmental protection). It also assesses whether the positive effects of the aid outweigh its negative effects in terms of distortions of competition in the internal market, while preventing overcompensation and ensuring a level playing field, in a context where not all Member States have decided to implement such compensation schemes. The evaluation is conducted under the “back-to-back” procedure established by the Better Regulation rules, meaning that the evaluation and the impact assessment are carried out in parallel as a single process. This procedure allows meeting the deadline of the start of the next ETS period on 1 January 2021 for the adoption of the revised ETS Guidelines. Under this procedure, the evaluation is annexed to the Impact Assessment report. The Commission has already performed a comprehensive evaluation in 2015 for the revision of the ETS Directive, which also covered the impact of indirect ETS costs on the carbon leakage risk. The evaluation therefore builds on the results of the 2015 evaluation underpinning the proposal for a revised ETS Directive. This time, the evaluation only covers ETS aspects related to the implementation of the 2012 ETS Guidelines. In terms of geographical scope, this evaluation covers all EU Member States and EEA States even if only 12 Member States and EEA States have decided to implement ETS indirect costs compensation schemes. One of the aspects of the evaluation is to examine why some Member States have decided to implement such compensation schemes and why some others have decided not to implement such schemes. In terms of temporal scope, the evaluation covers the period from the entry into force of the ETS Guidelines in 2012. The evaluation assesses the aid to undertakings in sectors and subsectors deemed to be exposed to a significant risk of carbon leakage due to EU ETS allowances costs passed on in electricity prices (aid for indirect ETS costs). Other measures set by the 2012 ETS Guidelines are not covered by this evaluation: ·Investment aid to highly efficient power plants, including new power plants that are carbon capture and storage (CCS)-ready (cf. section 1.2 of the 2012 ETS Guidelines); ·Aid involved in optional transitional free allowances for the modernisation of electricity generation (cf. section 1.3 of the 2012 ETS Guidelines); ·Aid involved in the exclusion of small installations and hospitals from the EU ETS (cf. section 1.4 of the 2012 ETS Guidelines). In Phase 3, the ETS Directive provided for the possibility to grant investment aid between 1 January 2013 to 31 December 2016 (using revenues generated from the auctioning of allowances) to support the construction of highly efficient power plants, including new power plants that are ready for the environmentally safe capture and geological storage of CO2 ("CCS-ready"). The 2012 ETS Guidelines therefore set the compatibility conditions for such investment aid. The ETS Directive also allowed excluding certain small installations and hospitals from the EU ETS if the GHG reductions could be achieved outside the framework of the EU ETS at lower administrative cost. As the exclusion of certain small installations and hospitals may involve State aid, the ETS Guidelines currently set some rules for the State aid compatibility of such measures. None of these two measures have ever been notified by Member States to the Commission (no decision adopted), it would therefore be difficult for the Commission to evaluate them. Regarding the aid for the modernisation of electricity generation, the ETS Directive allows the granting of free allowances to electricity generators in exchange of investments undertaken by the beneficiaries in upgrading their infrastructure, in clean technologies and in diversifying their energy mix (Article 10c of the ETS Directive). This derogation to the principle that no free allocation shall be made in respect of any electricity production (Article 10a(1) of the ETS Directive) will remain during Phase 4 of the EU ETS but the conditions to implement such derogation will change. The compatibility rules provided in the 2012 ETS Guidelines for such measure currently mirror the rules included in the ETS Directive for Phase 3 of the EU ETS. In particular, one of the conditions for the aid to be considered compatible is compliance with the ETS Directive, the Commission Decision on guidance on the methodology to transitionally allocate free allowances to installations for electricity production pursuant to Article 10c(3) of the ETS Directive and the Commission Communication on the optional application of Article 10c of the ETS Directive. The transitional free allocation for the modernisation of the power sector under Article 10c of the ETS Directive was subject to the evaluation of the ETS Directive, which concluded that no distortion of competition as consequence of Article 10c could be found. The policy options concerning Article 10c of the ETS Directive have also undergone a full impact assessment. For this reason, a new evaluation of the transitional free allocation for the modernisation of the power sector would duplicate the one already performed for the ETS Directive. Under the Better Regulation principles, all evaluations should assess the evaluation criteria of effectiveness, efficiency, coherence, relevance and EU added value of the intervention: ·Effectiveness: how successful has the EU action been in achieving its objectives? To what extent do the observed effects link to the intervention?

·Efficiency: to what extent are the costs associated with the intervention proportionate to the benefits it has generated? ·Relevance: how well do the (original) objectives of the intervention (still) correspond to the needs within the EU? ·Coherence: to what extent is the intervention coherent with other interventions which have similar objectives? To what extent is the intervention coherent internally? ·EU-added value: what is the additional value resulting from the intervention, compared to what could reasonably have been expected from Member States acting at national and/or regional levels? What would be the most likely consequences of stopping or withdrawing the existing EU intervention? All these evaluation criteria are assessed under the present evaluation. 2.Background to the intervention 2.1.Description of the intervention and its objectives At the time of the adoption of the 2012 ETS Guidelines, the core EU policy context consisted in the EU’s Climate and Energy Package adopted by the European Council in March 2007. The ETS Directive, as revised in 2009, was a central component of that policy which laid down two binding targets to be achieved by 2020: first, a reduction of CO2 emissions by 20% from the emissions level in 1990 and, second, increasing the share of renewable energy sources in the EU to 20% of overall energy consumption (over the same time span). At the time, the European Council established a (non-binding) target to increase energy efficiency by 20% in 2020. 2.1.1.General objective The general objective for the Commission was to adopt, under the State aid provisions of the TFEU (Article 107(3)(c)), Guidelines for the assessment of State aid for the compensation of indirect ETS costs arising in the context of Phase 3 of the EU ETS. 2.1.2.Specific objectives The ETS Guidelines aim at establishing the conditions under which Member States can implement the possibility set in Article 10(a)6) of the ETS Directive to adopt financial measures benefiting sectors exposed to carbon leakage risk in compliance with EU State aid rules. The need is to avoid carbon leakage that would impair the objective of the EU ETS to reduce GHG emissions by increasing CO2 emissions outside the ETS area due to lower production, lower investment and relocation of EU firms as a result of higher costs imposed by the EU ETS. As set in recital 5 of ETS Guidelines: "in line with the balancing test formulated in the 2005 State aid action plan, the primary objective of State aid control in the context of the implementation of the EU ETS is to ensure that State aid measures will result in a higher reduction of greenhouse gas emissions than would occur without the aid and to ensure that the positive effects of the aid outweigh its negative effects in terms of distortions of competition in the internal market." Recital 8 of the ETS Guidelines further states that "addressing the risk of carbon leakage serves an environmental objective, since the aid aims to avoid an increase in global greenhouse gas emissions due to shifts of production outside the Union, in the absence of a binding international agreement on reduction of greenhouse gas emissions. At the same time, aid for indirect emission costs may have a negative impact on the efficiency of the EU ETS. If poorly targeted, the aid would relieve the beneficiaries of the cost of their indirect emissions thereby limiting the incentives for emission reductions and innovation in the sector. As a result, the costs of reducing emissions would have to be borne mainly by other sectors of the economy. Furthermore, such State aid may result in significant distortions of competition in the internal market, in particular whenever undertakings in the same sector are treated differently in different Member States due to different budgetary constraints. Therefore, these Guidelines need to address three specific objectives: minimising the risk of carbon leakage, preserving the EU ETS objective to achieve cost-efficient decarbonisation and minimising competition distortions in the internal market.” Competition distortions can be twofold: ·Intra-sector distortions would arise if only one or some Member States decide to support installations within eligible sectors. ·Inter-sector distortions could arise in situations where there is substitutability between materials and products manufactured by different sectors, one or some being eligible for compensation under the ETS Guidelines. The ETS Guidelines are not self-executing. Member States are enabled but are not obliged to address carbon leakage risk due to indirect ETS costs in their respective jurisdictions. The ETS Guidelines set the conditions under which Member States can implement indirect ETS costs compensation schemes – should they choose to do so – in compliance with EU State aid rules: ·List of eligible sectors: Member States can grant compensation for indirect ETS costs only to certain sectors that are deemed to be exposed to a risk of carbon leakage. These sectors are listed in Annex II of the ETS Guidelines. In line with Article 10a(15) of the ETS Directive, sectors and subsectors listed in this Annex have been deemed to be exposed to a significant risk of carbon leakage due to indirect ETS costs on a quantitative basis if the intensity of trade with third countries is above 10% and the sum of indirect additional costs induced by the implementation of the ETS Directive would lead to a substantial increase in production costs, calculated as a proportion of the gross value added (GVA), amounting to at least 5%. Similar with the provisions in Article 10a(17) of the ETS Directive, the assessment of sectors and subsectors on the basis of quantitative criteria has been supplemented with a qualitative assessment, where relevant data were available and industry representatives or Member States have made sufficiently plausible and substantiated claims in favour of eligibility. The qualitative assessment was applied, firstly, to borderline sectors, i.e. NACE-4 sectors which have faced increased indirect emission costs in the range of 3-5% and a trade intensity of at least 10%; secondly, to sectors and subsectors for which official data are missing or are of poor quality; and thirdly, to sectors and subsectors that can be considered to have been insufficiently represented by the quantitative assessment. Sectors or subsectors with less than 1% indirect CO2 costs have not been considered.

·Calculation formula: the ETS Guidelines provides the calculation formula to determine the maximum aid amount that can be granted by Member States when compensating undertakings for indirect ETS costs. The calculation formula takes into account the installation’s baseline production levels or the installation’s baseline electricity consumption levels as defined in the Guidelines, as well as the CO2 emission factor for the electricity supplied by combustion plants in the geographic area where the installation is located. The formula ensures that the aid is proportionate and that it maintains the incentives for electricity efficiency and the transition from “grey” to “green” electricity, in accordance with recital 27 of Directive 2009/29/EC. ·Application of the State aid balancing test: on 7 June 2005, the Commission adopted a State aid action plan presenting the guiding principles for a comprehensive reform of State aid rules. This action plan set that “State aid should only be used when it is an appropriate instrument for meeting a well-defined objective, when it creates the right incentives, is proportionate and when it distorts competition to the least possible extent. For that reason, appreciating the compatibility of State aid is fundamentally about balancing the negative effects of aid on competition with its positive effects in terms of common interest.” The ETS Guidelines ensure that these principles are respected when Member States decide to implement indirect ETS costs compensation schemes. 2.1.3.Intervention logic Figure 1 below illustrates the intervention logic of the 2012 ETS Guidelines. The Guidelines are the main Commission’s tool to assess the compatibility with the internal market of Member States’ compensation granted to address the risk of carbon leakage due to indirect ETS costs identified by the ETS Directive. The overall objective of the ETS Guidelines is to find a balance between addressing the risk of carbon leakage due to indirect ETS costs and preserving the incentive for a cost-effective decarbonisation of the economy, while minimizing competition distortions. The expected result of the implementation of the ETS Guidelines is a positive influence on relocation decisions in sectors eligible for indirect ETS costs compensation as per the ETS Guidelines, while preserving the incentive for cost-effective decarbonisation for these sectors. Another intended result is the minimisation of competition distortions through homogeneous rules applying throughout the EU. As the EU has an exclusive competence on competition issues, it is able to define common State aid rules applicable to all Member States willing to implement an indirect ETS costs compensation scheme. Unintended results are competition distortions if the ETS Guidelines do not adequately target sectors exposed to a significant risk of carbon leakage. In addition, as not all Member States have implemented an indirect ETS costs compensation scheme, there is a risk of competition distortions across the EU. Also, not all Member States have implemented compensation schemes as of the entry into force of the ETS Guidelines. To the contrary, the implementation of indirect ETS compensation schemes is progressive throughout the EU and is likely to continue to progress over the next trading period (see Table 1 in Implementation / State of Play below). The intervention also creates administrative costs. ETS Guidelines had an unexpected impact on bilateral contracts between electro-intensive users and producers of electricity from renewable energy sources. Recital 11 of the ETS Guidelines set that “In case of electricity supply contract that do not include CO2 costs, no State aid will be granted” which can be interpreted by Member States as an exclusion of renewable power purchase agreements (“PPAs”) from indirect cost compensation. However, it has been pointed out that prices of renewable electricity are linked to market prices and therefore include CO2 emission costs, therefore excluding them from compensation makes entering into a renewable PPA less attractive than into fossil fuel based PPAs or buying power on the wholesale market, in which cases the consumer can receive compensation (see Effectiveness below). The ETS Guidelines’ impact takes place in a framework where other policies (within the EU or outside) can have an impact: ·Complementary policies, in and outside the EU: the ETS Directive recognizes that the risk of carbon leakage would diminish if major trading partners would adopt equivalent climate policies with equivalent carbon costs on their domestic industries. The number of emissions trading systems around the world is increasing. Besides the EU ETS, national or sub-national systems are already operating or under development in Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States. Inside the EU, Member States are also free to implement more stringent energy policies. ·Free allowances to tackle carbon leakage risk incurred by direct ETS costs: the ETS Directive provides for the protection of EU sectors at significant risk of carbon leakage due to CO2 costs resulting from the EU ETS. Besides the compensation of indirect ETS costs for some sectors, the ETS Directive also establishes the granting of free allowances to certain sectors (listed in the Carbon Leakage List). ·Other support measures with an impact on the electricity bill: Apart from the compensation mechanism set by the ETS Directive, Member States have other possibilities to influence the electricity costs for electricity consumers, in particular electro-intensive undertakings. This can take various forms. Article 17 of the Energy Taxation Directive provides that Member States can apply reduced levels of taxation to electricity when used by energy-intensive undertakings. In addition, reduction systems can apply to the electricity network tariffs, the levies imposed on electricity bills to finance renewable electricity (or other types of levies imposed on electricity consumption). Finally, electro-intensive undertakings can participate into interruptibility schemes. ·Anti-dumping measure: a non-EU company is “dumping” if it exports a product to the EU at a price lower than the normal value of the product. The Commission is responsible for investigating dumping claims and imposing measures. Anti-dumping measures (usually an “ad valorem” duty) can be put on imports of specific products if the Commission’s anti-dumping investigation justifies it. Such measures also have an effect on international competitiveness of EU undertakings and may have an influence on the risk of carbon leakage. 2.2.Baseline and points of comparison Directive 2009/29/EC introduced for the first time in the EU ETS the possibility for Member States to provide State aid to compensate for higher electricity costs due to the EU ETS. Phase 3 of the EU ETS that started on 1 January 2013 was therefore the first trading period in which such State aid measure was introduced. Phase 1 (2005-2007) and Phase 2 (2008-2012) of the EU ETS had stable caps over time on the total amount of GHG emissions that could be emitted by installations covered by the EU ETS. Phase 3 of the EU ETS is more stringent as the cap on emissions falls by 1.74% each year (see Figure 2 below). As a result, GHG emissions from sectors covered by the EU ETS will be in 2020, 21% lower than in 2005. Notes:Graph shows verified CO2 emissions from stationary sources.

LRF=Linear Reduction Factor (annual rate of decline in CO2 cap, 2021-2030). Source:European commission, S&P Global Platts As a consequence of such reduction of the ETS cap, the CO2 price was expected to increase during Phase 3. The CO2 price has been volatile since the launch of the EU ETS in 2005 as shown in the Figure 3 below. Source:Sandbag Before the implementation of Directive 2009/29/EC and of the ETS Guidelines, no Member State had been granting aid to reduce carbon leakage risk due to indirect ETS costs. The baseline scenario was therefore a situation where no State aid was granted for the compensation of indirect ETS costs. 3.Implementation / State of Play 3.1.Description of the current situation 12 Member States have introduced schemes to compensate for indirect ETS costs. In addition, Norway has also implemented such compensation scheme. Pursuant to Article 108§3 of the TFEU, prior to the implementation of the scheme, Member States have to notify it to the Commission under EU State aid rules. Once the Commission has adopted a no objection decision, the ETS compensation scheme can enter into force in the Member State concerned. The map below shows Member States having introduced an ETS compensation scheme: Created with mapchart.net © Member States are free to design their national ETS compensation scheme as long as they fulfil all the conditions set out in the 2012 ETS Guidelines. In particular, Member States can choose the financing of their compensation scheme. It can, for example, be financed through the national budget (or regional budget, as in Wallonia) or through the auctioning of emission allowances (e.g. in Flanders and Greece). In case the revenues from the auctioning of emission allowances do not cover the total amount required for compensation of indirect ETS costs, the aid amount is reduced or adjusted proportionately for all eligible undertakings. One Member State (Spain) has adjusted the budget of its indirect ETS costs compensation scheme during the implementation period. Such amendment of the budget is subject to a prior notification to the Commission under State aid rules. Another Member State (France) has submitted a notification to the Commission to amend its ETS compensation scheme so that the aid received under such scheme can be cumulated with other types of aid as per point 47 of the 2012 ETS Guidelines. Only the Netherlands performed an evaluation of the scheme at national level in 2017. The conclusion of that evaluation was overall positive, as the scheme was assessed as effective and efficient. Six Member States (Germany, the Netherlands, Belgium (Flanders), Slovakia, Finland, Poland) and Norway have introduced a consumption threshold to limit the administrative burden of processing applications under the schemes. The aim of the threshold is to avoid a situation where administrative costs both for potential beneficiaries and the State are disproportionally high compared with the aid amount. The threshold was set in an objective way, on the basis of the calculation of the hypothetical aid amount corresponding to that level of electricity consumption. That hypothetical aid amount has been estimated between EUR 8,333 per beneficiary (PL), EUR 4,200 (DE, SK), EUR 4,000 (NL and BE Flanders), and EUR 2,520 per year in FI. This amount is different for each Member State for the following reasons: (i) the decisions are adopted in different years and the forward price used for the calculation varies between the years; (ii) the CO2 factors are different (see Annex of the 2012 ETS Guidelines); and (iii) Finland applies a lower aid intensity, as compared to the permissible one under the 2012 ETS Guidelines. The Table below presents the list of Member States (and Norway) having introduced an ETS compensation scheme:

Member State Duration of the scheme Budget of the scheme Commission decision United Kingdom 2013 – 2020 £ 113 million (2013-2015) SA.35543 Germany 2013 – 2020 € 576 million (2013-2015) SA.36103 The Netherlands 2013 – 2020 € 156 million (2014-2015) SA.37084 Belgium (Flanders) 2013 – 2020 € 7-113 million (annual budget based on CO2 price) SA.37017 Spain 2013 – 2020 € 695 million (2013-2020) SA.36650 / SA.45164 / SA.49751 / SA.53427 Greece 2013 – 2020 € 14-20 million (annual budget based on CO2 price) SA.38630 Lithuania 2014 – 2020 € 13,1 million (2014-2020) SA.41981 Slovakia 2014 – 2020 € 250 million (2014-2020) SA.43506 France 2015 – 2020 € 364 million (2015-2018) SA.43389 / SA.49875 Finland 2016 – 2020 € 149 million (2016-2020) SA.44378 Belgium (Wallonia) 2017 – 2020 € 17,5 million (2017-2020) SA.49630 Luxembourg 2017 – 2020 € 48-60 million (2017-2020) SA.51097 Poland 2019-2020 Approximately € 417,5 million (2019-2020) SA.53850 Romania 2019-2020 €291 million (2019-2020) SA.56403 EEA State EFTA Surveillance Authority decision Norway 2013-2020 Approximately € 286,5 million (2013-2020) 355/13/COL Ex post monitoring of State aid schemes is required under Article 108(1) TFEU, according to which “the Commission shall, in cooperation with Member States, keep under constant review all systems of aid existing in those States”. The Procedural Regulation provides a more specific legal basis as it obliges Member States to keep and provide the necessary documentation to the Commission for monitoring purposes. These provisions on monitoring are also included in the 2012 ETS Guidelines under point 54. In addition, point 50 of the 2012 ETS Guidelines states that “the Commission will regularly monitor aid granted to undertakings in sectors and subsectors deemed to be exposed to a significant risk of carbon leakage due to EU ETS allowance costs passed on in electricity prices […]”. Since the adoption of the 2012 ETS Guidelines, two ETS compensation schemes have been selected for ex post monitoring: the United Kingdom scheme in 2015 and the German scheme in 2017. As regard the ETS compensation scheme in force in the United Kingdom, the Commission concluded that the implementation of the scheme met all the compatibility conditions. Despite some irregularities, the examination of the sample of individual aid awards and the additional information provided by the United Kingdom clarified that these irregularities did not materialise in the granting of incompatible aid. Further to the verification of the legal basis of the German ETS compensation scheme and the examination of a sample of beneficiaries, the Commission concluded that the scheme met all the compatibility criteria. Based on information submitted by Member States under their obligation to submit annual reports, it appears that over the period 2013-2017, Member States have spent EUR 2 118,024 million through their schemes compensating for indirect ETS costs. Table 2 below present the spending of all Member States having implemented an indirect ETS costs compensation schemes for each year. Year Spending (EUR million) 2013 42,44 2014 408,25 2015 270,34 2016 517,38 2017 879,61 Total 2 118,024 Source:Member States annual reports 4.Method 4.1.Short description of data collection and assessment methods The evaluation was conducted using various methods and informed by the triangulation of a range of sources, including evidence and opinions gathered by external and internal studies, open and targeted consultation of stakeholders, information from annual reports submitted by Member States and ex post monitoring of indirect ETS costs compensation schemes. In particular, the Commission commissioned ADE and Compass Lexecon (“the Consortium”) to provide support in the combined evaluation and impact assessment study of the 2012 ETS Guidelines. The Consortium provided support to the Commission through the three following tasks: -Analysis of decisions of Member States to compensate indirect ETS costs for certain sectors or subsectors. This analysis was performed in two steps. First, the Consortium tried to identify the reasons that might explain why some Member States have or not implemented compensation schemes during Phase 3 of the EU ETS. It gathered data in order to assess if the choices were driven by structural evidence. To do so, the Consortium analysed data such as electricity consumption, electricity prices for different industrial sectors, producer prices, manufacturing levels, energy intensity rates, etc. in each Member State. This data were downloaded from public sources such as Eurostat. Second, the Consortium looked at the reasons behind these choices such as policy decisions. -Extensive literature review on the carbon leakage due to indirect ETS costs. The literature review built on the one conducted for the 2015 Evaluation and looked at the most recent information regarding the risk of carbon leakage due to indirect ETS costs that might have been avoided by the indirect cost compensation. In addition, this literature review gathered information regarding the impact of indirect ETS costs compensation on the decarbonisation objectives and the creation of market distortions. Any additional information regarding administrative costs or economic impacts of such a measure have also been gathered. The preliminary research showed that the publications focusing only on the carbon leakage due to indirect ETS costs are limited. Therefore, the Consortium provided an overview of the literature on carbon leakage risk due to ETS costs as a whole (including both direct and indirect ETS costs). It also considered the broader literature on the impact of electricity costs on competitiveness and focused on the answers from the public consultation to provide content to the Commission to answer the evaluation questions.

-Critical review of the public and targeted consultations responses. The answers from the public consultation launched in 2019 on the revision of the ETS Guidelines have been critically reviewed and summarised. Using those responses, the Consortium provided information related to the assessment of the Member States’ intervention based on the following criteria: effectiveness, efficiency, relevance, coherence and EU value added. The Consortium also focused on the market distortions within the EU and on the effect of compensation schemes on energy efficiency improvements during Phase 3 of the EU ETS. This evaluation is also supported by a Technical Report by the Joint Research Centre (the “JRC Technical Report”). The report evaluates in particular the effectiveness of the aid in the period 2013-2017 and the potential competition distortions, using firm-level data. Finally, this evaluation also reflects the results of the evaluation performed by the Netherlands of their national scheme in 2017, and the results of the ex post monitoring of the UK scheme in 2015 and the German scheme in 2017. 4.2.Limitations and robustness of findings One of the main limitations of the evaluation stems from the fact that many factors can influence relocation decisions and it is therefore very difficult to find evidence of the role of indirect ETS costs in such companies’ decisions. These exogenous factors, such as other production costs (e.g. energy or labour costs), geographical distance to market demand, supply and demand side changes along the value chain, etc. also have an impact on competitiveness of undertakings and therefore also play a role in relocation decisions. Such limitation was already highlighted in the 2015 Evaluation and is still relevant for the present evaluation. Another limitation derives from the fact that not all Member States provided reports on the implementation of their schemes, and some of the reports submitted are also incomplete. In addition, there is generally no distinction in academic literature between the impact of direct and indirect ETS costs on industry competitiveness, because fundamentally the potential loss of competitiveness is caused by uneven additional costs. It is also difficult to estimate indirect ETS costs as they depend essentially on estimates of the extent of cost-pass through in electricity. As a result, the aspect of carbon leakage caused by indirect ETS costs is generally studied in literature via an increase in input price, such as electricity or energy prices. It is also difficult to find studies analysing the recent period of the EU ETS (Phase 3). Most of available studies refer to Phase 1 and Phase 2 of the EU ETS where no indirect costs compensation was yet in place. The number of empirical studies with extension to Phase 3 is very limited and no published study so far has explored the very recent period with relatively high carbon price. The JRC Technical Report is the first study analysing the impact of the ETS indirect cost compensation at firm level with an EU-wide coverage. Even if the study is based on a unique panel dataset at firm level, containing detailed information on the beneﬁciaries of the ETS indirect cost compensation gathered from DG COMP and balance sheet ﬁnancial variables of ﬁrms extracted from the Orbis database, the study has some limitations. In the reports submitted by Member States some of the entries are transmitted only in part, or are not reported at all, despite the fact that they are in the possession of the corresponding national managing authority. When harmonising records provided by diﬀerent Member States, if any of the entries was not available even for one country or for a single year, then the entry cannot be used in the analysis. This issue greatly limited the possibility to exploit the available data in the analysis presented in the JRC Technical Report (see paragraph 6 of the JRC Technical Report). The 2015 Evaluation also highlights that the notion of carbon leakage can cover different assumptions (see Preamble of chapter 3.4 of the 2015 Evaluation: “it does not become immediately clear from public discussion and stakeholders comments what effects are subsumed under the term carbon leakage. Is it to be understood as loss of market share of an EU ETS installation to an extra-EU competitor, lower investments made in the EU, physical relocation of industrial installations to outside EU, or does it cover more than one or even all of those aspects?”). Under the 2012 ETS Guidelines, carbon leakage describes “the prospect of an increase in global GHG emissions when companies shift production outside the Union because they cannot pass on the cost increases induced by the EU ETS to their customers without significant loss of market share”. Some deviations might therefore arise between the scope of academic researches and the definition given by the 2012 ETS Guidelines. Finally, the fact that Member States implemented compensation measures makes it difficult to identify the risk of carbon leakage. Even if compensation of indirect ETS costs was implemented for the first time only during Phase 3 of the EU ETS, the granting of free allowances for direct ETS costs was already in place during the first two phases of the EU ETS. It is therefore difficult to establish what would have been the impact of ETS costs without compensation measures of any type of ETS costs. All these limitations have an impact on the analysis of both the current situation and the baseline scenario. 5.Analysis and answers to the evaluation questions 5.1.Overview of the Evaluation questions Relevance ·To what extent are the ETS Guidelines still relevant? oTo what extent does the original objective of the Guidelines to minimise the risk of carbon leakage while preserving the incentive for a cost effective decarbonisation of the economy without creating undue competition distortion still correspond to the needs of the EU?

Effectiveness ·To what extent did the ETS Guidelines successfully achieve the three objectives pursued? oTo what extent did the ETS Guidelines adequately minimise the risk of carbon leakage at the minimum cost? oTo what extent did the ETS Guidelines prevent undue competition distortions? oTo what extent did the ETS Guidelines preserve the incentive for cost effective decarbonisation of the economy? Efficiency ·To what extent are the costs associated with the ETS Guidelines proportionate to the benefits they have generated? EU added value ·What is the additional value resulting from the fact that the Commission has adopted State aid Guidelines, compared to what could have resulted from a case-by-case assessment of the notified national ETS compensation schemes? Coherence ·To what extent is the indirect CO2 cost compensation coherent with the objective of the Green Deal Communication and the New Industrial Strategy for Europe Communication? ·To what extent is the indirect CO2 cost support coherent with other interventions which have similar objectives? 5.2.Relevance ·To what extent are the ETS Guidelines still relevant? oTo what extent does the original objective of the Guidelines to minimise the risk of carbon leakage while preserving the incentive for a cost effective decarbonisation of the economy without creating undue competition distortion still correspond to the needs of the EU? 5.2.1.Implementation of ETS costs compensation schemes over the third trading period The 2015 evaluation first analysed whether factors could explain the choice of Member States to implement schemes compensating for indirect ETS costs or not. The 2015 evaluation conducted an analysis of the drivers for the implementation of indirect ETS costs compensation schemes in six Member States that had implemented such scheme at the time. The evaluation could not identify a specific economic or market specific driver and concluded that these decisions were rather motivated by policy considerations. It analysed in particular the following factors: ·Level and evolution of electricity prices: the cost of electricity varies from one Member State to another. One could expect Member States with higher electricity prices or Member States with a recent increase in electricity prices to favour the implementation of a compensation mechanism.

·Level of electricity taxes: the existence of other types of support for electro-intensive industries may influence Member States’ decision to implement indirect ETS costs compensation schemes. ·Share of energy-intensive industry: the industrial structure and market characteristics explain if some structural specificities of a Member State can worsen the situation for a sector and create discrepancies within Europe. ·Political considerations: policy makers may consider a range of policy instruments to reduce the risk of carbon leakage. The paragraphs below update that analysis, in particular by taking into account the additional schemes implemented in various Member States in the period 2015-2019. Level and evolution of electricity prices The 2015 evaluation report considered the level of electricity prices, the evolution of electricity prices and the evolution of electricity prices against the evolution of producer price index. For all these parameters, the report concluded that they could not provide a clear explanation as to why Member States with an ETS compensation scheme in place took such decision. As presented in the 2015 evaluation report, a few points need to be considered before looking at historical electricity prices: ·There is no reference for electricity prices for electro-intensive industries. Most of these prices are the result of bilateral contract negotiations with electricity suppliers ready to provide advantageous contractual conditions in exchange for important volume of consumption. Therefore the electricity prices for large industries may serve as indicator for final prices but do not reflect the exact bill of electro-intensive industries. ·The retail electricity prices consist of various price components: wholesale electricity prices, sales costs, network costs, taxes and levies. The level of these additional cost components depend entirely on the type of consumers. ·The electro-intensive consumers often benefit from exemptions or reductions from certain taxes and levies (see section below). Having clarified these points, the 2017 electricity prices for large industrial consumers across Europe are presented in Figure 5 below. Notes:Large electricity industrial consumers: 20,000–70,000 MWh per year, European Union category is calculated as the average of EU members’ ratios (when data are available). Source:Eurostat, data code nrg_pc_205 As shown on the graph above, the absolute level of power prices does not explain why some Member States have implemented a compensation scheme and others not. Some Member States with high electricity prices have not implemented indirect cost compensation such as Denmark, Cyprus and Italy. At the same time, some Member States with lower electricity prices in 2017 compared to the EU average have implemented a compensation mechanism such as Finland, Luxembourg or Norway. Figure 6 below presents the evolution of electricity prices for Member States that have implemented a compensation scheme in 2013 at the beginning of phase 3 of the EU ETS. It shows that in the United Kingdom, Spain, Germany, the Netherlands and Greece, this implementation occurred after a strong increase in power prices over the period 2011-2012. This trend is less visible for Belgium and Norway.

Notes:Large electricity industrial consumers: 20,000–70,000 MWh per year Source:Eurostat, data code nrg_pc_205 Member States that have implemented a compensation scheme at a later stage during phase 3 of the EU ETS seem to follow an opposite trend (See Figure 19 in Appendix B). Compensation schemes were generally implemented after a period of decrease in power prices or after a phase of stagnation (e.g. Finland, Luxembourg and Slovakia). In this category, the exception is France that implemented the compensation after an increase in electricity prices. As regards Member States that have not implemented a compensation scheme, electricity prices in these Member States decreased over the period as in the rest of Europe (see Figure 20 in Appendix B). This decrease in electricity prices could have been a driver for non-implementation of mechanisms. However some Member States presented above have decided to implement their support schemes exactly during this period. The electricity price evolution only provides information regarding the additional costs for industry without providing information regarding the selling prices for industrial production. Power prices increased over the period 2009-2012 in most Member States. This increase occurred at the same time as an increase in the output price of industry. One could have expected to see a compensation implemented in Member States for which the output prices had not increased relatively to electricity prices, but historical data do not confirm this assumption (see Figure 21 in Appendix B). Indeed, the two Member States with an increase in electricity prices but with a decrease in producer index over the period 2009-2012 are Malta and Sweden and they do not have a compensation scheme in place. Overall, it can be concluded that few Member States might have implemented a compensation scheme after an increase of power prices over the period 2011-2012, but the evolution of prices is probably not the main driver to explain the heterogeneity of compensation implementation within the EU. Looking at the evolution of power prices against the output price of industry, the information is also mixed, and this parameter cannot provide the entire picture regarding the reasons behind the implementation of a compensation scheme related to indirect costs in some Member States. Evolution of electricity taxes and other types of support Electro-intensive industries often benefit from reduction in taxes, levies, fees and charges included in electricity or energy prices. Large industrial consumers generally pay around half the taxes paid by small industrial consumers. This spread has widened in recent years. These differences vary across Europe as shown in Figure 7 below. One could expect Member States with no compensation scheme to provide fiscal advantages and similarly those with compensation measures to remove those for large industrial consumers. This assumption is confirmed on the graph below as important differences can be observed between large industrial prices and small industrial consumers prices (due to lower taxes and network charges) in some Member States without compensation mechanism. However, a similar spreads exist between these two prices in Member States with compensation mechanisms such as France, Germany, the Netherlands and Spain. Therefore, the role of tax and network charges on electricity in the implementation of support schemes in Europe is not conclusive. Notes:Member States that have implemented a compensation mechanism related to indirect costs. Band IB corresponds to a consumption of 20–499 MWh per year and Band IF corresponds to 70,000-150,000 MWh per year. Source:Report “Energy prices and costs in Europe”, European Commission. Data based on DG ENER in house data collection Electro-intensive industries may also receive different support measures to reduce their electricity bill, for example an interruptibility load schemes. These interruptibility schemes remunerate the industry in exchange of load reduction during critical periods for the power network. To participate, the industrial plant needs to be flexible which means that it needs to be able to reduce quickly its electricity consumption when required by the transmission system operator. Overall, Member States have several options to provide additional remunerations to electro-intensive industries. In conclusion, the analysis on other supports such as reduction in taxes and levies or interruptibility contracts is not conclusive to explain the heterogeneous implementation of indirect ETS costs compensation scheme across Europe. Industry structure

Current levels of industry GVA as a share of national GDP does not provide clear conclusions on the decisions regarding the implementation of compensation mechanisms. Several Member States with important share of their GDP coming from industry for the year 2016 (e.g. Czechia and Ireland) did not have existing compensation mechanisms. When looking at the evolution of this ratio over time, the picture is also mixed. For all Member States with an existing compensation scheme, the ratio has decreased or remained stable between 2008 and 2016 (except for Lithuania and Slovakia). However, this evolution might be linked to the 2008 crisis and the evolution between 2012 and 2016 provide a different picture. Indeed, the picture is mixed over this period with Member States showing an increase in the ratio such as France, Lithuania or Slovakia while other Member States facing a decrease such as the United Kingdom, the Netherlands and Norway. Therefore, it cannot be concluded that this indicator is relevant to determine the reasons behind the implementation of a compensation scheme as the picture is also mixed for Member States without compensation. Figure 8 below presents the share of industry electricity consumption over the total industry GVA for each Member State. This ratio was slightly different in the 2015 Evaluation report. The previous report presented the ratio between energy consumption and GVA. It was decided to modify this graph in order to represent the electricity consumption that is more relevant for indirect ETS cost compensation. It is interesting to notice that four out of the five Member States with highest ratios have introduced a compensation mechanism. However, this ratio is not a differentiating factor as some Member States with an existing scheme have very low ratios such as Germany, the United Kingdom and the Netherlands. Here again the conclusions are mixed. Notes:European Union is calculated as the average of EU members averages (when data countries were available). In thousands tonnes of oil equivalent per million euros. Source:Eurostat, source code sbs_na_ind_r2, sbs_na_con_r2 and nrg_110a. The same conclusions are visible on the graph in Figure 9 below that presents the part of GVA of eligible sector to indirect ETS costs compensation under the 2012 ETS Guidelines over the Member States’ GVA. The part of eligible sectors are equally split between Member States with and without existing compensation mechanisms. Source:Eurostat, source code sbs_na_ind_r2 In conclusion, no stand-alone criteria based on the industry structure can justify why some Member States have implemented a compensation scheme or not. The importance of industry for the Member States does not provide conclusive messages nor does the industrial electricity consumption within Member States. The repartition of sectors eligible to indirect ETS costs compensation under the 2012 ETS Guidelines over Member States also provide a mixed picture. Trade exchanges The large majority of Member States with existing compensation schemes have an important percentage of their trade occurring with countries outside Europe. The main exceptions are Luxembourg, Slovakia and Belgium. However, some Member States with important share of trade being done with countries outside Europe have not implemented a compensation scheme, such as Italy and Ireland. A large majority of Member States in central-western Europe have implemented a compensation scheme (see map in Implementation / State of Play above). These decisions might have been driven by previous decisions taken by neighbouring markets. Only few markets (Lithuania, Slovakia and Greece) have implemented a compensation scheme in isolation without the measure being present in neighbouring EU markets. These three countries might have implemented a compensation mechanism for different reasons: a direct and close competition with non-EU neighbouring markets or important trading partners located in Member States having a scheme in place. The analysis of main trading partners of Member States that have implemented a compensation scheme shows that these Member States have strong business relations with other Member States in the same situation. Lithuania, Slovakia and Greece have strong commercial relation with Germany and this might explain the choice of implementing a compensation scheme. However, similar trends exist for Member States with no existing compensation scheme. Most of these markets have strong business relations with Member States that have implemented a compensation scheme. This trend is particularly significant for Denmark, Ireland and Italy. Some Member States might have implemented a compensation scheme because their trading partners have one, being in their neighbourhood or not. However, based on the historical data presented above, the opposite trend also exists. Therefore, no clear conclusion on the link between commercial partners within Europe and compensation mechanism can be presented. Policy considerations

The 2015 evaluation stated that energy intensive industries have a strategic position in the economic value chain of many Member States and that this may be the reason why some Member States have decided to implement indirect ETS costs compensation schemes. Contributions received from Member States in the targeted consultation show that, for those Member States that have implemented an indirect ETS costs compensation scheme, the main reason invoked is the need to avoid carbon leakage. Greece highlighted that it is particularly vulnerable due to its geographical location, France mentioned the need to limit distortions of competition within Europe and Slovakia also referred to the low administrative burden for setting up and managing the scheme. For those Member States not having implemented an indirect ETS costs compensation scheme, budgetary constraints or the use of the funds from the auctioning of free allowances for other purposes are two of the main considerations for not implementing a scheme. Ireland and Malta argue that few beneficiaries would have been eligible. Sweden explained that the indirect ETS costs compensation is fundamentally inconsistent with the ETS objectives and should be phased out. Czechia is considering introducing a scheme in the next trading period since the CO2 price has increased and since the neighbouring Member States have implemented or are implementing a similar scheme. The increase in CO2 prices in early 2018 was also the main reason for Poland to recently decide to introduce a scheme. Italy also added that CO2 prices were low in the third trading period and that there is a lack of empirical evidence on the effectiveness of such compensation in preventing carbon leakage. As it was already noticeable from the 2015 Evaluation, it appears that policy considerations are the main driver for Member States deciding to implement or not an indirect ETS costs compensation scheme. Other factors, such as the level and evolution of electricity prices, the evolution of electricity taxes and other types of support, the industry structure within Member States, and trade exchanges among Member States and with third countries do not provide conclusive correlation that would explain the choice of Member States to implement or not an indirect ETS costs compensation scheme. This is confirmed by contributions from Member States to the consultation activities. 5.2.2.Evolution of the legal and economic frameworks over the third trading period Evolution of the CO2 price As shown in Figure 10 , the carbon price in the EU ETS market has stayed at a low level between 2012 and 2017, with an average price of 7€/tCO2 as a result of emission allocation oversupply and an inflexible market design. This low and flat trend has changed radically since mid-2017. The carbon price increased from about 5€/tCO2 in July 2017 to above 25€/tCO2 in May 2019. This steep rise in carbon prices since mid-2017 was mainly driven by the entry into force of the revised EU ETS Directive in April 2018, with reinforced decline in the annual emission cap and the Market stability reserve (MSR), improving the balance between demand and supply of allowances of the EU ETS scheme. Source:Energy market prices The up to date market view for the Phase 4 of EU ETS is that the current level of carbon prices is expected to remain. Figure 11 presents a benchmark exercise of available carbon prices projections. According to this benchmark, carbon prices in the EU ETS are expected to remain in the range 15-35€/tCO2 in Phase 4, creating higher direct and indirect costs for European industries compared to the previous EU ETS phases. Note:The benchmark was performed in April 2019. Source:Compass Lexecon research based on EC, AIE, Energy aspects, Thomson Reuters, Point Carbon, ICIS, JP Morgan, Nomisma energia, BNEF Evolution of the legal framework over the third trading period As mentioned in 1.1.3 above, the ETS Directive has been revised in 2018 for the next trading period. Under the revised Directive, the calculation method used to determine sectors exposed to carbon leakage risk has changed. Article 10(b), paragraph 1 of the revised Directive defines sectors deemed to be at risk of carbon leakage as those where the product exceeds 0.2 from multiplying their trade intensity by their emission intensity (measured in kgCO2/GVA), whereas the 2012 ETS Guidelines refer to trade intensity and indirect ETS costs and use them independently from each other (see description in 2.1.3 above). The revised ETS Directive also introduced market reform measures to improve the stability of EU ETS and to tackle the oversupply problem. The Market Stability Reserve (MSR) started in 2019, aiming at neutralizing the negative impacts of the existing allowance surplus and at improving the system’s resilience to future shocks. The modifications of the EU ETS legal framework introduced by the revised ETS Directive have an impact on the functioning of the EU ETS, which is the reference framework for the ETS Guidelines. For the next trading period, ETS Guidelines remain relevant to the extent they are aligned with the revised ETS Directive and the changes introduced in the EU ETS.

5.2.3.Conclusion As already reported in the 2015 evaluation, it is not possible to establish a clear relationship between economic or market factors and decisions from Member States to implement or not an indirect ETS costs compensation scheme. Political considerations seem to remain the main driver for Member States in this regard. However, the increase of the CO2 price in the last years of the third trading period as well as the forecast of a continuously high CO2 price during the fourth trading period is an indication that the ETS guidelines remain relevant as the risk of carbon leakage has not vanished. As shown by figures presented in section 3 above, since the increase of the CO2 price in 2017, additional Member States have decided to implement an indirect ETS costs compensation scheme and the amount of compensation allocated by Member States has also increased in the recent years. Such remaining risk is also acknowledged by the revised ETS directive, which set the definition of sectors at risk of carbon leakage due to the ETS. It is therefore relevant to maintain ETS Guidelines for the next trading period, while revising them to adapt them to the evolution of the economic situation and the legal framework of the EU ETS. 5.3.Effectiveness ·To what extent did the ETS Guidelines successfully achieve the three objectives pursued? oTo what extent did the ETS Guidelines adequately minimise the risk of carbon leakage at the minimum cost? oTo what extent did the ETS Guidelines prevent undue competition distortions? oTo what extent did the ETS Guidelines preserve the incentive for cost effective decarbonisation of the economy? In the 2015 evaluation the effectiveness of indirect cost compensation could not be determined sufficiently, mainly because of the lack of evidence for carbon leakage. The Impact Assessment of the 2012 ETS Guidelines concluded that monitoring and reporting procedures would have allowed the Commission to assess progress towards the specific objectives of the initiative. The Commission should have received precise and comprehensive reports on any aid granted in different Member States including aid amounts and the sectors to which aid has been paid. That data was meant to inform the assessment of the extent of possible distortions in the internal market. However, as already outlined in paragraph 4.2 above, the data collection suffered from inconsistent and incomplete reporting. That Impact Assessment was also based on the assumption that the carbon price would be around 30€/tCO2. Sensitivity tests were also carried out, using carbon prices lower (10 and 20€/tCO2) and higher (40€/tCO2) than the primary price assumption. As already mentioned in paragraph 5.2.2, the average carbon price in the EU ETS market between 2012 and 2017 was 7€/tCO2, therefore even below the lowest price used for the sensitivity analysis. Taking into account the difficulties linked to above-mentioned considerations, the evaluation of the effectiveness is based on recent literature, on the outcome of the public and targeted consultations and is supported by the JRC Technical Report which provides some insights by analysing the available data from the reports to determine the impact of indirect cost compensation on certain performance indicators. The JRC Technical Report is based on the information in the records on the beneﬁciaries of indirect cost compensation that were provided to the Commission by the Member States with an approved State Aid under the EU ETS Guidelines. The data was then linked to the Orbis Bureau Van Dijk database, which contains balance sheet information of ﬁrms. The JRC analysis comprises ﬁrms operating in 12 Member States - 6 of which provide funding for indirect cost compensation, belonging to 27 diﬀerent sectors, for the period 2009–2017. The report looks at ﬁrms operating in all eligible sectors, as well as on the subgroup from the aluminium sector. This data allowed to compare the average change in performance for a group of ﬁrms receiving compensation with the one of a similar group of ﬁrms that operate in the absence of aid, following a Diﬀerence-in-diﬀerences (DiD) approach. Such approach consists in taking the diﬀerence of the outcome before and after the treatment for ﬁrms in the control group and subtracting it from the same diﬀerence observed among ﬁrms in the treated group. 5.3.1.Minimisation of carbon leakage The impact assessment report of the 2012 ETS Guidelines recalled that the first specific objective is to prevent carbon leakage. The 2012 impact assessment report further details that carbon leakage means that even if the GHG emissions reduction target of the EU ETS is met, that effect may be impaired, neutralized or even outweighed by an increase in CO2 emissions outside the ETS following relocation by EU firms in ETS sectors due to the higher costs imposed by the EU ETS.

The gap in electricity prices between Europe and other parts of the world put EU industries at a competitive disadvantage, and this disadvantage may be exacerbated by rising carbon costs. As shown in Figure 12 , Europe has higher electricity costs than China and the United States for industry. Source: EC, Enerdata, 2019 This evaluation has updated the results of the 2015 evaluation in this respect by analysing the more recent literature and checking those results against the outcome of the public and targeted consultations. In addition, this evaluation also builds on the results of the study conducted by JRC (see below). Literature review In line with the 2015 Evaluation’s conclusion, the results of the updated literature review suggest that up to date there is no hard evidence of carbon leakage caused by EU ETS. All the results of the updated literature review are presented in Appendix A to this evaluation. However, there are several factors that need to be considered before drawing final conclusions on carbon leakage. Many recent empirical studies still focus on the first two phases of EU ETS, the number of empirical studies with extension to Phase 3 is very limited and so far, no published study has explored the very recent period with relatively high carbon price. However, when more recent data is tested, some research shows that the impact of carbon pricing is more significant for this period, although these results are not representative of the industry as a whole. It remains to see whether future studies that include persistent high carbon prices could find larger impacts of carbon prices on industry competitiveness and decisions to relocate installations outside the EU, leading to carbon leakage. From the short-term perspective (as presented Appendix A ), the lack of evidence of carbon leakage may have multiple explanations, ranging from over-allocation of emission allowances, persistent low carbon price until mid-2017, some ability of firms to pass-through additional costs, the relatively low share of energy costs in the EU compared with other regions of the world, the effect of the existing anti-carbon leakage measures, to innovations in energy efficient industrial processes stimulated by carbon regulation. All these factors may have safeguarded to some extent the industries against negative impacts of the carbon pricing on competitiveness and carbon leakage. Additionally, other fundamental cost drivers, such as other components of energy costs, labour costs as well as taxation may have an offsetting or countervailing effect on firms’ production decisions. From the long-term perspective (as presented in Appendix A ), the lack of evidence through investment channel may be related to the time that such effects take to materialise. Indeed, investment cycles are typically long, and capital stock is long-lived in most industrial sectors, meaning that carbon leakage would only materialise at the moment of investment or reinvestment. Given that 14-years’ experience of EU ETS is relatively short compared with the typical industrial capital stock life, the long-term carbon leakage effects may need to be assessed over a longer period of time and it may be too early to provide any definitive conclusion. Additionally, the lack of evidence of carbon leakage could also imply that the effects of EU ETS on altering investment decisions and on stimulating innovations cancel out each other, or that some of the other fundamental cost drivers, such as other components of energy costs, labour costs as well as taxation may have a countervailing effect on firms’ investment decisions. Finally, as stated in the 2015 Evaluation, the fact that carbon leakage did not happen in the past when carbon prices were relatively low does not mean that it will not happen in the future. The recent increase of the ETS carbon price suggests that careful monitoring and additional empirical studies leveraging more recent data may provide different results on the evidence of carbon leakage (Nordic Council of Ministers, 2019; Healy et al., 2018). Consortium analysis of the risk of carbon leakage of sectors The analysis conducted by the Consortium based on publicly available economic data and cross-checked with the information and data received in the targeted consultation of interested sectors, covered also the sectors eligible under the 2012 ETS Guidelines (for more information on the use of data, see Annex 2). Even if that analysis is forward looking, it shows that for some of those sectors the existence of a risk of carbon leakage is confirmed for the fourth trading period. The Consortium assessed different criteria: the market characteristics of the sector (existing and future trade patterns; whether the sector is price taker or price maker on the market; the market structure and the bargaining position of the sector), its profit margins (current and long-term situation in the EU, feasibility of relocation of activity outside the EU) and its abatement potential (current electricity consumption levels in the sector, the adoption of the best available technologies within the sector and its impact on profit margins). This sectorial analysis show that some sectors see their profit margins strongly impacted by indirect ETS costs. For those that are not in a position to pass-through these indirect ETS costs to their downstream customers or do not have potential for energy efficiency gains, indirect ETS costs can trigger a risk of carbon leakage.

Stakeholders responses to consultation activities To the question whether the implementation of compensation schemes by Member States prevented carbon leakage, 41.9% of respondents to the public consultation replied negatively and 7.3% positively. As 87% of the total respondents to the public consultations were industrial stakeholders, those percentages are not indicative of more general trends. Respondents with a positive opinion of the impact of compensation schemes to prevent carbon leakage are mostly industrial stakeholders located in Poland, which introduced a compensation scheme in 2019. Those stakeholders explain that, in combination with a low CO2 price, it has had a positive influence on carbon leakage risk. Reference is also made to other compensation mechanisms having an impact on costs of undertakings, such as, at EU level, the granting of free allowances, and at national levels reductions in financing of production of renewable energy. Respondents having replied negatively to the question are also almost entirely industrial stakeholders belonging to both sectors eligible for compensation (e.g. aluminium) and sectors not eligible (cement). Those replies mainly present elements related to design of the compensation schemes to justify that they did not help preventing carbon leakage. In particular, the fact that not all Member States have implemented compensation schemes, and for those who did, not necessarily in the same manner (e.g. with different levels of aid intensity) is criticised. The fact that only partial and degressive compensation could be granted, based on historical output, is also perceived negatively. Some industries say that the compensation cannot be fully effective unless it compensates 100% of the indirect costs. However, there is no evidence presented that would have quantitatively assessed the optimal level of compensation which makes it challenging to demonstrate the need for a full compensation. Respondents also point the lack of visibility of the regulatory framework for the coming years that prevent long-term investments. It is to be noted that many negative replies came from sectors not eligible to indirect ETS costs compensation under the 2012 ETS Guidelines (or from companies located in a Member State with no compensation scheme in place). Moreover, even if a majority of stakeholders replied negatively on the prevention of carbon leakage, very few concrete examples of carbon leakage have been provided by the respondents. Only three sectors (among which, two were not eligible for compensation under the 2012 ETS Guidelines) provided specific examples of production sites shut down in Europe due to increased electricity costs. Some other sectors refer to relocation decisions without providing evidence that they are related to indirect ETS costs. Of the 10 Member States with a scheme in place having responded to the targeted consultation (Belgium, Germany, Greece, Spain, Finland, France, Lithuania, Luxemburg, Netherlands, Slovakia) and Norway, the majority mentioned the need to avoid carbon leakage as the main consideration for implementing a scheme. Greece highlighted that it is particularly vulnerable due to its geographical location. France mentioned the need to limit distortions of competition within Europe. In addition, in their reply to the targeted consultation to the Member States, the Netherlands summarised the results of a voluntary evaluation of the national scheme in 2017. The reply explains that the evaluation was based on a statistical comparison between the beneficiaries of the scheme and a control group of firms outside the scope of the scheme and that the conclusions were generally positive. On the possible improvements, the evaluation suggested to focus the scheme to a greater extent on companies where indirect electricity costs as a consequence of the ETS have the greatest adverse impact on international competitiveness. For example, the reply explains that the evaluation argues that the risk of carbon leakage is lower on markets where transport costs account for a larger share of total costs, where product variations are greater and if the impact of electricity costs on value added is small. JRC study The effectiveness of the ETS Guidelines at the firm level is assessed based on some relative measures of firms’ performance - namely: labour productivity (turnover/employees), assets per employee (total assets/employees) and on some variables in absolute terms, i.e. turnover (operating revenue), total assets and number of employees.The indicators selected by JRC cannot however be considered as being able to capture the occurrence of carbon leakage, but are only proxies that could provide some indications of the existence of such a risk. In particular, competition distortion is measured in terms of the effects of the intervention on per worker measures of turnover and value of total assets. The risk of carbon leakage is evaluated on the basis of firm-level indicators of turnover, value of total assets and number of employees. The findings of the study conducted by the JRC are in line with the existing literature analysing single country interventions (mainly on tax exemptions and tax refunds). The results presented in the JRC Technical Report suggest that “receiving compensation for indirect costs does not have a statistically significant impact on labour productivity of firms in comparison to those that do not receive funding. Conversely, the evidence points to a negative effect on performance measured in terms of turnover, value of total assets and employment”. Those results are difficult to justify. This might be due to a multitude of factors that affect firms’ economic performance. As far as the analysis on aid intensity is concerned, which only contemplates a more homogeneous pool of firms operating in aiding countries, a higher level of subsidies appears to reduce the risk of carbon leakage, as performance measured in terms of turnover, value of total assets and number of employees improves. Specifically, the estimated coefficients imply that firms receiving a higher subsidy experience a positive and significant impact on the measures of turnover, total assets and employment considered, in comparison to businesses that receive lower aid amounts. Estimated coefficients suggest that, for each 1% increase in the amount of the subsidy received (i.e. around 1,000 EUR), firms expand their turnover and their assets value by 0.01%, and their workforce by 0.07%. This effect is however marginal. 5.3.2.Prevention of competition distortions Another specific objective of the 2012 ETS Guidelines is to minimise distortion of competition in the internal market. This section triangulates the results of the internal case practice, the outcome of the public consultation, and the results of the JRC study (see Error! Reference source not found. below). Regarding competition distortion within the EU, the fact that only 12 Member States have implemented a scheme compensating for indirect ETS costs could in principle have created intra-sector distortions when the compensation is implemented only in some Member States, or due to different levels of compensation across Member States with a compensation scheme in place. The outcome of the public consultation

This conclusion seems to be corroborated by some replies to the public consultation. In fact, respondents to the public consultation had mitigated views on the impact of indirect ETS costs compensation on competition distortion across the EU: less than 1/3 (30.65%) of the respondents replied that it had no impact and approximately the same percentage (29.84%) of respondents replied that it had one. Some industrial sectors (eligible to receive indirect ETS costs compensation) explain that they are facing competition mainly with extra-EU production, mostly from regions without carbon cost and that the indirect ETS costs compensation has mitigated to some extent the adverse effects of globally distorted level playing field between EU producers and international producers. However, other sectors (not eligible to indirect ETS costs compensation or located in a Member State with no compensation scheme in place) argue on the contrary that the indirect ETS costs compensation has created market distortions, both inter-sector and intra-sector. JRC study As stated above, the JRC study concludes that the indirect cost compensation had little or negligible impact on turnover per worker and value of total assets per employee. It is therefore very difficult to derive any indication on distortions of competition on this basis. As far as the analysis on aid intensity is concerned, which only contemplates a more homogeneous pool of firms operating in aiding countries, JRC concludes that higher compensation amounts do not seem to generate competition distortion. 5.3.3.Preservation of the incentive for cost effective decarbonisation of the economy The impact assessment report of the 2012 ETS Guidelines recalled that another specific objective is maintaining the efficiency of the EU ETS. The formula for the calculation of the aid amount foreseen in the 2012 ETS Guidelines only allowed for a partial compensation of indirect ETS costs. First, the aid intensity was limited to 85% (at the start of the trading period) and was degressive, and second, the efficiency benchmark parameter in the calculation formula was set by reference to the most electricity-efficient method of production for the product considered, which means that any installation that is not using the best available technique would not receive the highest possible aid amount. Such partial compensation is, in principle, an element that contributed to maintaining the incentives to improve energy efficiency. In addition, some Member States (Belgium, the Netherlands, Poland) introduced extra-requirements in the design of their indirect ETS costs compensation scheme, as they imposed to beneficiaries to participate in an energy management system or to undergo energy audits to benefit from indirect ETS costs compensation. Such additional requirement was aimed at ensuring that beneficiaries of indirect ETS costs compensation will actively undertake measures to become more energy efficient. Public consultation responses indicate that the Guidelines have not hindered the incentive for the industry to improve energy efficiency: 57% of respondents state that the amount of compensation for indirect ETS emission costs has not undermined the incentive for decarbonisation of the economy, while only 6% of the respondents say it has. Many respondents explain that the compensation of indirect ETS emission costs did not undermine the incentive to decarbonise as energy costs represent a significant cost item for electro-intensive industries and therefore energy efficiency is necessary to maintain their competitiveness. Some even say that it increased the incentive for industries to decarbonise because it makes electricity more attractive compared to fossil fuel energies. However, climate associations point out that GHG emissions have not decreased in Europe and highlighted that compensations undermine companies and governments’ incentives for decarbonisation. Eurostat data on total GHG emissions trend for the Union, in the period from 1990 to 2017 show that there was a general downward trend to emissions during the 1990–1999 period (aside from a relative peak in 1996, when a cold winter led to an increase in heating requirements). From 1999 to 2006 the evolution of GHG emissions within the EU-28 remained relatively unchanged, although it started falling at a modest pace through to 2008. The year 2009 saw a sharp drop in emissions as a consequence of the global ﬁnancial and economic crisis and the resulting reduced industrial activity. Emissions increased in 2010 and decreased again from 2011 onward. In 2015, GHG emissions slightly increased compared to 2014. In 2016 the decreasing tendency returned. Emissions increased by 0.7% (30 million tonnes of CO2-equivalents) between 2016 and 2017. Source:Eurostat (env_air_gge), European Environment Agency Across EU Member States in 2017, GHG emissions were the highest in Germany (21% of the EU-28 total or 936 million tonnes of CO2-equivalents), followed by the United Kingdom and France. The biggest decreases compared to 1990 were reported for Lithuania, Latvia, Romania and Estonia (– 57 %, – 56 %, – 54 % and – 48 % respectively). On the other side of the spectrum, the biggest increases compared to 1990 were reported for Cyprus (+ 56 %), Portugal (+ 23 %) and Spain (+ 22 %). As for the risk of carbon leakage, it is difficult to obtain evidence of the impact of the 2012 ETS Guidelines on the decarbonisation of the Union economy. The JRC Technical Report highlights that no data is available to assess the impact that indirect cost compensation has had on ﬁrms’ behaviour in terms of electricity consumption, as not all Member States transmitted the relevant information in the reporting. In addition, the EU ETS is one of the main EU initiatives to reduce emissions, but it is not the only one (for example, the “Eﬀort Sharing Decision” which monitors the implementation of Member States’ emission reduction targets in the sectors outside the EU ETS, the introduction of targets to increase renewable energy sources to 20 % by 2020 and to increase Europe’s energy eﬃciency by 20 % by 2020). The granting of free allowances may also distort the price signals created by the EU ETS. It is therefore essential that the aid is limited to the minimum necessary. This conclusion seems to be confirmed by the results of the evaluation carried out by the Netherlands at national level in 2017, which concluded that it is important to focus the scheme on companies where indirect electricity costs as a consequence of the ETS have the greatest adverse impact on international competitiveness. 5.3.4.Horizontal issues As regards the formula for the calculation of the aid amount set in the 2012 ETS Guidelines, the evaluation of how some of the parameters have been applied was performed. These parameters affect in various ways the three objectives pursued by the 2012 ETS Guidelines. The CO2 emission factor

An assessment of how the electricity market integration in the Union has developed during the period 2008-2017 shows that only some of the regions defined in the 2012 ETS Guidelines for the purpose of setting the CO2 factor continued to meet the price convergence condition established by the 2012 ETS Guidelines throughout the period. Notes:The numbers in brackets refer to the number of bidding zones included in the piece of analysis. While ACER did not formally disclose the region definition, we assume that Baltic corresponds to Estonia, Lithuania, Latvia, Core CWE corresponds to Germany/Austria, France, Belgium and the Netherlands, SWE to Spain, France and Portugal, Nordic to Norway, Sweden, Finland, and Denmark. For core CEE ACER defined new capacity calculation regions in 2016 November, based on which Hungary is a member of the new Core region, which is composed of the former Central and Western European (CWE) and Central and Eastern European (CEE) regions, complemented by Romania and Croatia, and IU to Ireland and United Kingdom. Source:ENTSO-E and ACER calculations (2018) It can be concluded from the above figure that: ·For the Nordic zone: the share of hours of full convergence has tended to decrease since 2012. It reached about 15% in 2017, compared with about 30% in 2012. The combined share of full and moderate convergence has remained stable at around 55%; ·For the CWE region: the share of hours of full convergence has significantly increased since 2013. It reached about 40% in 2017, compared with less than 20% in 2013. However, it remains below the 2011 level (more than 60%). Large discrepancies are observed between quarters: during the first and last quarter of 2017, relatively low price convergence and large price differ