Table of contents 1.Introduction: Political and legal context 1.1.The EU ETS 1.2.The 2012 ETS Guidelines 1.3.The ETS Guidelines in ETS Phase IV 1.4.Recent events 2.Problem definition 2.1.What is/are the problems? 2.2.Size of the problem and limitations 2.3.What are the problem drivers? 2.4.How will the problem evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1.General objective 4.2.Specific objectives 4.3.Operational objective

4.4.Consistency with other EU policies 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.2.1. Sector eligibility 5.2.2. Estimation of indirect ETS costs 5.2.3. Maximum aid amount 5.2.4. Conditionality 5.3.Options discarded at an early stage 5.3.1. Discontinuation of the ETS Guidelines 5.3.2. CO2 factors 5.3.3. Output 5.4.From options to packages 5.4.1. Packages of policy options to determine the indirect ETS costs 5.4.2. Packages of policy options to determine the maximum aid amount 6.What are the impacts of the policy options? 6.1.Impacts of the options on sector eligibility 6.1.1. Methodology 6.1.2. Economic and social impact – carbon leakage 6.1.3. Economic and social impact – competition distortions:

6.1.4. Environmental impact 6.1.5. Impact on SMEs 6.2.Impacts of the packages estimating indirect ETS costs 6.2.1. Methodology to determine the CO2 factors 6.2.2. Methodology to determine the output data 6.2.3. Economic and social impact – carbon leakage 6.2.4. Economic and social impact – competition distortions 6.2.5. Environmental impact 6.2.6. Impact on SMEs 6.3.Impacts of the packages reflecting the Maximum aid amount 6.3.1. Methodology 6.3.2. Economic and social impact – carbon leakage 6.3.3. Economic and social impact – competition distortions: 6.3.4. Environmental impact 6.3.5. Impact on SMEs 6.4Impacts of the options regarding conditionality 6.4.1 Methodology 6.4.2 Economic and social impacts – Risk of Carbon Leakage 6.4.3 Economic and social impacts – competition distortions: 6.4.4 Environmental impacts

6.4.5 Impact on SMEs 7How do the options compare? 8Preferred option 8.1REFIT (simplification and improved efficiency) 9How will actual impacts be monitored and evaluated? Appendix 1 – methodology for qualitative analysis of carbon leakage risk due to indirect emission costs Appendix 2: Eligibility under option A Appendix 3: Assessment of carbon leakage risk for each sector Appendix 4: Carbon leakage risk under several scenarios Appendix 5: number of undertakings with less than 250 employees Appendix 6: additional data about CO2 factors Appendix 7: Quantification of options Table of references

Table of Annexes Annex 1: Procedural information Annex 2: synopsis report Annex 3: evaluation report ANNEX 4: WHO IS AFFECTED AND HOW?

Table of Figures Figure 1 : Intervention logic Figure 2: Comparison of national emission factors and EU-wide emission factor – 2018 data (t/MWh) Figure 3: Indirect Carbon Leakage Indicator (ICLI) of the 41 sectors Figure 4: Repartition of employment and Gross Value Added (GVA) among the sectors eligible under option A0 Figure 5: Repartition of indirect costs by carbon leakage risk for sectors eligible under option A0 Figure 6 : Sectors with the highest employment as a share of total employment Figure 7: Repartition of indirect costs by carbon leakage risk for sectors eligible under option A1 Figure 8: Repartition of indirect costs by carbon leakage risk for sectors eligible under option A2 Figure 9: Repartition of indirect costs by carbon leakage risk for sectors eligible under option A3 Figure 13: Evolution of the coupled markets in Europe since 2012 Figure 14: % of hours with convergence of electricity prices Figure 15: Comparison regional emission factor to national emission factor Figure 10: Benchmarks of carbon price projections based on market forecasts Figure 11: Indirect carbon costs as a share of GVA borne after a 75% compensation with carbon price at 25€/t CO2 Figure 12: Indirect carbon costs as a share of GVA borne after a 75% compensation with carbon price at 35€/t CO2 Box 1: Carbon leakage

Box 2: Formula - maximum aid amount pursuant to point 27 of the 2012 ETS Guidelines Box 3: Details on the four qualitative assessment criteria Table 1: Impacts of policy options Table 2: Level of power price convergence and CO2 factor for the new geographic regions Table 3: CO2 factors based on 2018 data Table 4: Carbon leakage risk under several levels of compensation Table 5: Comparison of carbon leakage risk under several scenarios Table 6: Evolution of national emission factors 2002-2017 Table 7: Estimated budget, compensated indirect ETS costs and electricity consumption under each eligibility option Table 8: Estimated budget in function of the aid intensity (in EUR), under each eligibility option Table 9: Indirect emissions compensated (in tons CO2) in function of the aid intensity, under each eligibility option Table 10: Proportion of indirect emissions compensated in function of the aid intensity, under each eligibility option Table 11: Indirect emissions as a proportion of emissions from power generation, in function of the aid intensity, under each eligibility option Glossary Term or acronym Meaning or definition BAT Best Available Technologies CEP Clean Energy Package CHP Combined Heat and Power COVID-19 Coronavirus disease 2019 CWE Central-Western Europe EEA European Economic Area EEAG Guidelines on State-aid for environmental protection and Energy EED Energy Efficiency Directive EFTA European Free Trade Association EU European Union EU ETS European Union Emission Trading System EUA Emission Unit Allowance GHG Greenhouse Gases GVA Gross Value Added ICLI Indirect Carbon Leakage Indicator = Trade Intensity * Indirect emission intensity JRC Joint Research Centre NACE Statistical classification of economic activities in the European Community (NACE = Nomenclature statistiques des Activités économiques dans la Communauté Européenne) SMEs Small and medium-sized enterprises SWD Staff Working Document SWE South-Western Europe TFEU Treaty on the Functioning of the European Union TSO Transmission system operators





1.Introduction: Political and legal context 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. The EU has committed itself to cut greenhouse gas emissions by at least 40% below 1990 levels by 2030. On 11 December 2019, the Commission published the European Green Deal Communication, outlining the policies to achieve climate-neutrality in Europe by 2050. The Commission had already set out a clear vision of how to achieve climate neutrality 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 is being paid by the Commission when there are potential trade-offs between economic, environmental and social objectives. On 4 March 2020, the Commission adopted the proposal for a European Climate Law. With the European Climate Law the Commission proposes a legally binding target of net zero greenhouse gas emissions by 2050. By summer 2020, the Commission will present an impact assessed plan to increase the EU’s greenhouse gas emission reductions target for 2030 to at least 50% and towards 55% compared with 1990 levels in a responsible way. To deliver these additional greenhouse gas emission reductions, the Commission will, by June 2021, review and propose to revise where necessary, all relevant climate-related policy instruments. On 10 March 2020, the Commission also published the New Industrial Strategy for Europe Communication. The Communication stresses that all industrial value chains, including energy-intensive sectors, will have a key role to play in the European Green Deal. They will all have to work on reducing their own carbon footprints but also on accelerating 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. The effects of these recent Commission policies on the initiative, as well as the impact of the COVID-19 outbreak are taken into account to the extent possible in this Staff Working Document (see also Sections 1.3 and 2.4). 1.1.The EU ETS In this context, the European Union Greenhouse Gas Emission Trading System (EU ETS) was introduced in 2005 to reduce CO2 emissions in a cost-effective way and combat climate change. It was the first international system for trading Greenhouse Gases (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. After each year a company must surrender enough allowances to cover all its emissions, otherwise fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. 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 III). Phase III of the EU ETS is based on a stricter and single EU-wide cap, the allocation of allowances are made on 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 CO2 emissions that contribute to climate change. The ETS Directive has been revised for its next trading period 2021-2030 (Phase IV), with the adoption of Directive (EU) 2018/410 , to enable it to achieve the EU's 2030 emission reduction targets. 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 they consume (so-called “indirect ETS costs”). Indirect ETS costs stem from the fact that the electricity producers pass the carbon price on 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 “direct emission 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. 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 also refers to investment plans that would not take place within the EU borders. Carbon leakage would eventually lead to the offset and neutralization of the CO2 emission reductions in the EU. As long as this effect materializes in full, carbon leakage would result in an increase in global CO2 emissions as a result of increased emissions outside the EU exceeding reduced emissions inside the EU. This effect may however only be partial, and hence carbon leakage would not necessarily lead to higher overall global emissions. To address this risk of carbon leakage, the ETS Directive sets the possibility for certain sectors to receive allowances for free. The list of sectors eligible considered at risk of carbon leakage and therefore eligible for receiving free allowances is laid down in the Carbon Leakage List. The revised ETS Directive has changed the methodology used to determine the sectors exposed to carbon leakage risk and eligible for free ETS allowances during Phase IV. Article 10 (b) - paragraph 1 of the ETS Directive defines sectors eligible on the basis of a quantitative analysis as those where the product exceeds 0.2 from multiplying their trade intensity by their emission intensity (measured in kgCO2/GVA), whereas the current 2012 ETS Guidelines require that both indicators reach a certain threshold independently from each other. In particular, this new quantitative analysis consists in multiplying, for each sector, the intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area (annual turnover plus total imports from third countries), by their emission intensity, measured in kgCO2, divided by their gross value added (in euros). Article 10 (b) - paragraphs 2 and 3 of the ETS Directive defines sectors that may be eligible on the basis of a qualitative assessment as those whose product resulting from multiplying their intensity of trade with third countries by their emission intensity exceeds 0.15 (paragraph 2) and show an emission intensity divided by their GVA exceeding 1.5 (paragraph 3).

Article 10a (6) of the ETS Directive also foresees that Member States may adopt financial measures in favour of sectors exposed to carbon leakage risk due to “indirect ETS costs” provided that such measures comply with State aid rules. The revised 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 [...]." Accordingly, the revised Article 10a (6) now foresees 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 ETS for the most energy efficient firms. Otherwise, aid would introduce economic distortions within the EU economy and have a detrimental impact on the incentive effects and efficiency of the EU ETS. Recital 13 of the Directive states that “when reviewing its State aid guidelines on compensation for indirect emission costs, the Commission should consider inter alia the usefulness of upper limits on the compensation granted by Member States.” It is part of a broader context which is that, as set in Article 10a (6) of the revised ETS Directive, “Member States shall also seek to use no more than 25% of the revenues generated from the auctioning of allowances” for the financing of indirect ETS costs compensation measures. This Article further states that “as from 2018, in any year in which a Member State uses more than 25% of the revenues generated from the auctioning of allowances for such purposes, it shall publish a report setting out the reasons for exceeding that amount. The report shall include relevant information on electricity prices for large industrial consumers benefitting from such financial measures, without prejudice to requirements regarding the protection of confidential information. The report shall also include information on whether due consideration has been given to other measures to sustainably lower indirect carbon costs in the medium to long term.” 1.2.The 2012 ETS Guidelines 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. Article 107 (2) and (3) 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 this principle are applied equally across the EU, Article 108 of the TFEU specifies that the Commission should be in charge of ensuring that State aid complies with EU rules. The control of State aid rules is an exclusive competence of the Union. 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. In light 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. The list of eligible sectors is set in Annex I of the 2012 ETS Guidelines and comprises 13 sectors and 7 sub-sectors. They also provide that such aid must be limited in size. The maximum aid amount is calculated through a formula, which is set at point 27 of the 2012 Guidelines. The formula is a tool allowing Member States to calculate the individual aid amount to be granted to a specific aid beneficiary. Maximum Aid amount (EUR) = Aid intensity (%) * CO2 emission factor (t CO2 /MWh)* EUA price (t-1) (EUR/ton)* Electricity consumption efficiency benchmark (MWh/ton) * Output (ton) The formula aims at: a)Estimating the indirect ETS costs faced by each undertaking: this calculation is based on the multiplication of carbon price with the carbon content of the electricity and with the amount of electricity used. The amount of electricity used is evaluated by multiplying the production (expressed in tons) by the quantity of electricity involved in the most efficient production process for this product – namely the efficiency benchmark. oThe CO2 factor (measured in tCO2/MWh) measures the extent to which the price of the electricity consumed by the beneficiary is influenced by ETS costs. The price of carbon intensive electricity comprises a higher ETS component and hence attracts a higher factor. As electricity prices are generated via the merit order, this factor measures the impact of certain technologies on price formation (not the overall generation mix in a given country). oThe price of ETS allowances (measured in EUR). The higher the ETS price the greater the resulting increase in electricity prices. oThe benchmark for efficient electricity use (expressed in MWh/t), reflects the fact that companies should not be compensated for electricity consumption which is due to their own operational inefficiencies. Compensation is therefore calculated based on the most energy efficient installation for a given product category in the EU. The use of such efficiency benchmarks is legally prescribed by the revised ETS Directive. oThe production output (in t) is company specific. b)Defining the maximum aid amount: by applying an aid intensity to the estimation of indirect ETS costs- based on the most efficient production process, as defined above. oThe aid intensity (percentage). In 2012 Guidelines, the aid intensity is declining during Phase III (also called the degressivity of the aid intensity). In particular, the aid intensity could not exceed 85 % of the eligible costs incurred in 2013, 2014 and 2015, 80 % of the eligible costs incurred in 2016, 2017 and 2018 and 75 % of the eligible costs incurred in 2019 and 2020.

Paragraph 56 of the 2012 ETS Guidelines sets 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. […]”. As described in section 3.1. of the Annex 3 to this Report (Evaluation Report), twelve Member States (Germany, the Netherlands, Belgium (Flanders and Wallonia), Spain, Greece, Lithuania, Slovakia, France, Finland, Luxembourg, Poland, Romania), the United Kingdom, and Norway have implemented a scheme under the 2012 ETS Guidelines. Following a referendum that took place in June 2016, the British government announced the country’s withdrawal from the European Union in March 2017. At the time of writing, there is uncertainty regarding the shape of the future relationships between the European Union and the United Kingdom. At this stage, ETS State aid Guidelines will apply to the United Kingdom, at least until the end of the Transition period and possibly afterwards, depending on the outcome of the ongoing negotiations. 1.3.The ETS Guidelines in ETS Phase IV The Green Deal Communication and the ambition to reach climate neutrality by 2050 will require the revision of all relevant climate-related policy instruments. Once the necessary changes will be known in summer 2021, the context of the present initiative will likely change. The present initiative could therefore become a stop-gap measure until legislative changes to the functioning of the ETS resulting from the Green Deal are decided and introduced (see also section 2.4 below). Whether, and if so to what extent, those legislative changes to the EU ETS will trigger consequential changes to the future ETS Guidelines will have to be assessed once the nature and shape of these legislative initiatives becomes clear. The Commission will make sure that the ETS Guidelines remain consistent with, and contribute to all relevant climate related policy instruments that will be proposed in the context of the Green Deal to ensure effective carbon pricing throughout the economy, while respecting a level playing field. 1.4.Recent events Recognising the COVID-19 outbreak as a major shock to the global and Union’s economies and the need to mitigate these negative repercussions on the EU economy, on 19 March 2020, the Commission adopted a Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak. The aim of the Temporary Framework is to tackle the severe liquidity needs of undertakings due to the exceptional circumstances created by the COVID-19 outbreak. In particular, the Temporary Framework allows for compatible aid under 107 (3) (b) TFEU to remedy a serious disturbance in the economy (while the ETS Guidelines are based on 107 (3) (c)). The Temporary Framework complements the existing State aid rules in this crisis. 2.Problem definition 2.1.What is/are the problems? The evaluation of the current 2012 ETS Guidelines conducted in parallel to this Impact Assessment concluded that the existence of a carbon leakage risk due to indirect ETS costs is difficult to demonstrate empirically, even if the economic literature generally conclude that such risk exists. The Green Deal Communication also acknowledges that, as long as many international partners do not share the same climate ambition as the EU, there is a risk of carbon leakage. The evaluation concludes that in the context of increased CO2 prices since 2017, and the expectation for CO2 price to remain high over the next trading period, it is relevant to maintain State aid rules for indirect ETS costs compensation for the future. The evaluation also concluded that the effectiveness of the 2012 ETS Guidelines on the prevention of carbon leakage while minimising competition distortions in the internal market and preserving the incentives to decarbonise is also difficult to determine. On the basis of the conclusions of the evaluation, the problems to be addressed are twofold. The first problem to be addressed by this intervention stems from the risk of carbon leakage in the next trading period 2021-2030. Carbon leakage due to indirect ETS costs, should it materialize, risks to undermine on a global level the emission reduction objective pursued by the EU ETS. As such it would undermine the EU’s contribution to the objectives of limiting the average temperature increase well below 2° Celsius while pursuing a limit of 1.5 °C above pre-industrial level as defined by the 2015 Paris Agreement. Carbon leakage presents a risk as to this objective that could be avoided in the next trading period thanks to pre-emptive action. Second, the intervention addresses the risk of competition distortions stemming from the compensation of indirect ETS costs on national level. By granting aid to undertakings active in sectors that are not exposed to a significant risk of carbon leakage or by granting an inappropriate aid amount, Member States risk distorting competition between economic sectors that are substitutable as regards the product (inter-sector competition), resulting in encouraging the consumption of goods from eligible sectors to the detriment of goods from non-eligible sector. Next, the compensation of indirect ETS costs also risks distorting competition within the same sector active in several EU Member States (intra-sector competition). This is due to the fact that, as already mentioned in section 1.2 above, only some countries have a scheme in place: Germany, the Netherlands, Belgium (Flanders and Wallonia), Spain, Greece, Lithuania, Slovakia, France, Finland, Luxembourg, Poland, Romania, United Kingdom and Norway. Also, this second problem presents itself as a risk which can be mitigated by the design at EU level of the compensation granted to industries, i.e. by determining the maximum aid intensity during the next trading period as well as the CO2 emission factor that allows to calculate the indirect ETS costs contained in the electricity consumption in the various European electricity markets. A horizontal problem closely linked to the aforementioned problems relates to the risk that poorly designed compensation schemes may undermine the incentive for a cost-effective decarbonisation of the economy. The EU ETS creates a carbon price, which shall incentivise a cost-efficient reduction in CO2 emissions in industrial processes. Excessive compensation would undermine that price signal. 2.2.Size of the problem and limitations The evaluation of the 2012 ETS Guidelines also highlighted the difficulties in obtaining reliable empirical evidence about the impact of indirect ETS costs compensation on carbon leakage. As relocation decisions are multifactorial, it is difficult to isolate the impact of the compensation or the lack of compensation on the decision of undertakings to relocate outside the EEA to other jurisdictions that have less stringent climate regulations on GHG. That intrinsic characteristic of the concept of carbon leakage affects the assessment of the existence and size of such risk and therefore implies a certain degree of uncertainty. However, the evaluation demonstrated that the size of the risk of carbon leakage rises with the increase of carbon prices. 2.3.What are the problem drivers? The aforementioned problems are driven by the fact that the 2012 ETS Guidelines are based on the data and assumptions which dates from 2011. It is therefore possible that 2012 ETS Guidelines no longer adequately address the problems described above during Phase IV of the EU ETS, because there is a risk that the list of eligible sectors might be outdated or because the methodology to calculate the maximum aid amount might be outdated.

In particular, the evaluation of the 2012 ETS Guidelines noted that the revised ETS Directive has substantially reinforced the EU ETS. The cap on emissions will be subject to an increased linear reduction factor of 2.2% (compared to 1.74% during Phase III over 2012-2020) and a Market Stability Reserve has been introduced in order to remove the surplus of EUAs on the market. These two measures have coincided with a significant increase of the ETS price from around EUR 7 on average in 2012 to EUR 24.84 tCO2 in 2019. At the same time, the evaluation noted that the sectors might have developed in terms of production technologies and processes and exposure to international trade. Consequently their exposure to the risk of carbon leakage might have changed over the past eight years. The evaluation therefore concludes that the list of sectors eligible for indirect cost compensation during Phase III might not reflect the sectors most exposed to the risk of carbon leakage due to indirect ETS costs in Phase IV (over 2021-2030). In addition, the revised ETS Directive has modified the methodology for defining the sectors at risk of carbon leakage due to ETS costs. In fact, according to Article 10b (1) of the revised ETS Directive sectors and subsectors to which the product resulting from multiplying their trade intensity with third countries by their emission intensity exceeds 0.2 shall be deemed to be at risk of carbon leakage. Hereby, the revised ETS Directive deviates from the methodology applicable during Phase III. Under this methodology, a sector or subsector was deemed to be exposed to a significant risk of carbon leakage if the sum of direct and indirect additional costs induced by the ETS would lead to an increase of production costs of at least 5% and the intensity of trade with third countries was above 10%. The latter methodology had informed the list of sectors and subsectors eligible for indirect cost compensation under the 2012 ETS Guidelines. Against the considerations above, it cannot be excluded that the list of sectors contained in the Annex II of the 2012 ETS Guidelines might no longer precisely reflect the sectors that will be exposed to a significant risk of carbon leakage due to indirect ETS costs in Phase IV. Moreover, the evaluation concluded that the parameters of the formula to calculate the maximum aid amount might not be adequate to capture the indirect ETS costs passed on via the electricity price and faced by industrial sectors. The revised ETS Directive may give rise to an increase in the CO2 price during Phase IV. Both the linear reduction factor of 2.2% and the design of the Market Stability Reserve will progressively reduce the overall amount of available CO2 certificates and thereby contribute to a price increase if undertakings are not reducing their emissions sufficiently. This potential CO2 price increase could be passed on to industrial consumers via higher electricity prices, justifying the need to assess whether the initial formula still allows for an optimal level of compensation, in order to reduce carbon leakage risk due to indirect emissions costs. The evaluation has also concluded that the European energy markets have developed since the adoption of the 2012 ETS Guidelines both in terms of market integration and energy mixes. This might have an effect on the indirect ETS costs passed on in electricity prices which is not adequately addressed by the 2012 ETS Guidelines and it might impact issues identified above. In light of recent changes in European energy markets (interconnection, large increase in renewables, etc.) a revision of the geographical regions and the corresponding CO2 factors used in the formula to calculate the maximum aid amount might therefore be necessary. 2.4.How will the problem evolve? Problems identified in section 2.1 are likely to persist throughout Phase IV of the ETS. As described in section 1 above, the 2030 Climate Target Plan will provide insights into the required updates to the overall climate and energy framework and ensure overall coherence of the specific policy updates by June 2021, notably regarding the ETS Directive including its carbon leakage measures and possible alternatives. At this stage, it is not yet entirely clear which level of ETS price would be necessary to achieve the decarbonisation ambitions of the European Green Deal. Also the precise shape of the policy measures and legislative initiatives to achieve these ambitions have not yet been established with a sufficient degree of certainty. Once proposed by the Commission, these policy initiatives will then be shaped in the legislative process. An example of this is the future Carbon Border Adjustment Mechanism. The extent to which this mechanism can and will replace the protection against carbon leakage due to indirect ETS costs provided by the ETS State aid Guidelines will depend on various elements, most importantly: a)whether this mechanism will include a border adjustment also in relation to indirect ETS cost (i.e. differences in electricity prices between the EU and other trading partners) or only in relation to direct ETS costs (i.e. the cost of CO2 certificates to be purchased by EU producers); and b)for what pilot sectors the border adjustment will be introduced. These important policy choices concerning the future mechanism have not yet been made. In spite of this uncertainty, the revised ETS Guidelines – based on the provisions of the revised ETS Directive – have to enter into force already at the beginning of the fourth ETS trading period in January 2021. Therefore, until more profound legislative changes to the functioning of the ETS are decided and introduced, the identified problems and their described size are still valid. Despite the uncertainties, the main factors possibly affecting the further evolution of problems described under section 2.1 can already be identified. First, a further increase of the CO2 price might increase the indirect ETS costs faced by electricity consumers in Europe and thus increase the risk of carbon leakage due to indirect ETS costs. Second, industries might continue to further electrify their production processes increasing thus their exposure to indirect ETS costs passed on in the electricity prices, despite the foreseen increase by 2030 of the share of renewable energy in EU’s final energy consumption. Third, the policy choices made by Member States in relation to their energy mix will affect the ETS costs passed on in electricity prices, while at the same time the decision of Member States to implement national compensation schemes or not might continue to affect the risk of carbon leakage as well as the risk of competition distortions. Finally, the level of ambition of third countries in relation to their CO2 emission reduction efforts will affect the risk of carbon leakage due to indirect ETS costs in Europe. The first three potential evolutions should be addressed directly by the design of the compensation formula. The Guidelines should address the potential change of third countries ambition level by allowing adaptation of the Guidelines at any time, if this should be necessary for reasons associated with competition policy or in order to take account of other Union policies (such as a carbon border adjustment mechanism) or international commitments. Finally, it is difficult at this stage to predict what impact the current COVID-19 crisis will have on the problem. First of all, the crisis has a global dimension, which makes it difficult to estimate how it could impact possible carbon leakage decisions outside the EEA.

Secondly, the impact on EU carbon prices does not appear to affect the price estimates for the fourth trading period. At first, EU carbon prices have collapsed, dropping to around 15 EUR/ton on 18 March 2020, from as high as 25 EUR/ton mid-February 2020, thereby reducing the indirect CO2 costs faced by European consumers, including beneficiaries of indirect ETS costs compensation. The carbon price then recovered and established at above 20 EUR/ton two weeks later. Those changes are still in line with the price estimates for Phase IV, which vary from a low price scenario of 15 €/tCO2, a baseline scenario of 25 €/tCO2 and a high price scenario of 35 €/tCO2 and which are the basis for the analysis of this impact assessment (see also section 6 below). A number of economic forecasts recently published appear to confirm that the impact of the crisis on EU carbon prices does not appear to affect the price estimates for Phase IV. Already in April 2020 some carbon market watchers argued that the Market Stability Reserve (MSR) should bring the market back into balance in 2021. In June 2020, the Centre for European Policy Studies (CEPS) argued that if COVID-19 leads to sustained low emissions, the current MSR will not be able to prevent the total number of allowances in circulation from growing fast, which may lead to price declines. In general, the effectiveness of the MSR to handle supply-demand imbalances will rely heavily on future emission trends. These forecasted price developments are also consistent with the empirical basis for this impact assessment. Thirdly, the COVID-19 crisis could affect the output level produced by undertakings, in a context of economic slowdown. It is therefore important to design the compensation formula allowing for flexibility with regards to changes in both output level and CO2 prices. 3.Why should the EU act? 3.1.Legal basis Article 10a (6) of the revised ETS Directive encourages Member States to adopt financial measures in favour of sectors exposed to a genuine risk of carbon leakage due to significant indirect ETS costs, provided that such financial measures are in accordance with State aid rules. The Co-legislators thus require the Commission to adopt State aid rules which guide the design of national indirect cost compensation schemes. According to Article 3 (1) (b) of the TFEU, the Union has an exclusive competence as regards the establishment of the competition rules necessary for the functioning of the internal market. Article 108 TFEU entrusts the Commission with the review of aid schemes. The Commission may declare aid to be compatible with the internal market in the cases set out in Article 107 (3) TFEU. To this end, the Commission can set out in Guidelines the conditions, which would guide its compatibility assessment. 3.2.Subsidiarity: Necessity of EU action Article 5 (3) of the Treaty on European Union (TEU) provides that the principle of subsidiarity applies in areas which do not fall within its exclusive competence of the European Union. Article 3 (1) (b) of the TFEU provides that the EU shall have exclusive competence in the area of "the establishing of the competition rules necessary for the functioning of the internal market". The legal basis for the Guidelines (Article 107 (3) (c) TFEU) falls into this category of exclusive competence. Legally speaking, the issue of subsidiarity therefore does not arise. In any event, the need for action at EU level is established by the ETS Directive, which requires an assessment at Union level in order to determine sector eligibility . 3.3.Subsidiarity: Added value of EU action As the Treaty gives the EU an exclusive competence in the area of State aid control, the issue of subsidiarity does not arise. Nevertheless, the existence of revised ETS State aid Guidelines for Phase IV of the EU ETS has a distinct added value. The revised ETS State aid Guidelines will provide for uniform rules that will guide the Commission’s assessment of national compensation schemes under EU State aid rules. The Guidelines will thus give guidance to Member States when designing such compensation schemes. Hereby, the Guidelines will help targeting the national compensation payments to the sectors most exposed to the risk of carbon leakage due to indirect ETS costs, while ensuring that the compensation is limited to the minimum necessary minimising thus possible distortions of competition in the Internal Market. By setting the maximum aid amount that can be granted to beneficiaries, the ETS Guidelines aim at ensuring that no overcompensation will be granted to undertakings. According to the subsidiarity principle, it is for Member States to determine the adequate budget to allocate to State aid measures they implement. When doing so, they have to fulfil the obligation set under Article 10a (6) of the ETS Directive as well as the provisions of the ETS Guidelines setting the maximum aid amount that can be granted to beneficiaries. The revision of the ETS Guidelines will therefore focus on determining the maximum aid level ensuring that sectors exposed to carbon leakage risk will receive the necessary compensation without creating undue competition distortion on the internal market and without undermining the incentive for a cost-effective decarbonisation of the economy. In the absence of State aid Guidelines, the Commission would have to assess the compatibility with the internal market of schemes notified by Member States directly under the TFEU. That could give rise to higher administrative costs, as Member States would not have any ex ante guidance on how to design those schemes. The assessment would therefore be done on a case by case basis and would likely require several exchanges between the Commission services and Member States’ authorities to gather the necessary data to determine eligibility and proportionality. A case by case assessment would also increase the risk of inconsistencies. 4.Objectives: What is to be achieved? 4.1.General objective The general objective pursued by this intervention is to ensure that indirect ETS costs compensation is limited to the minimum necessary to avoid carbon leakage and undue competition distortions while preserving the incentives for a cost-effective decarbonisation of the economy. Addressing the risk of carbon leakage, by assisting beneficiaries to reduce their exposure to this risk, 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. To this end, the intervention needs to define the rules governing the Commission’s compatibility assessment under Article 107 (3) (c) TFEU of national schemes compensating sectors and subsectors exposed to a significant risk of carbon leakage for their indirect ETS costs. 4.2.Specific objectives This general objective translates into two specific objectives pursued by this intervention. The ETS Guidelines are not self-executing, but set the conditions under which Member State can design indirect ETS costs compensation schemes – should they choose to do so – in compliance with EU State aid rules. A first specific objective therefore is to prevent the risk of carbon leakage due to indirect ETS costs, by ensuring that the sectors which are most exposed to a risk of carbon leakage due to indirect ETS costs are eligible for indirect cost compensation. This should result in a list of sectors which therefore should be eligible for indirect ETS costs compensation during Phase IV of the EU ETS. At the same time, sectors that are not exposed to a risk of carbon leakage due to indirect ETS costs should not be eligible for indirect cost compensation. To this end, a methodology needs to be determined which allows to identify these sectors and subsectors. The second specific objective is to prevent the risk of unnecessary competition distortions in the internal market by ensuring that the maximum aid amount is proportionate, meaning that it does not go beyond the minimum necessary to address the risk of carbon leakage due to indirect ETS costs. To this end, the parameters that allow for the calculation of the maximum aid amount will need to be determined. These parameters will equally have to reflect market characteristics in Phase IV and the regulatory changes to the EU ETS triggered by the revised ETS Directive. Concretely, the intervention aims to define the aid intensity during Phase IV and a proxy to calculate the indirect ETS costs passed on in electricity prices.

By achieving those objectives, the intervention will also achieve the horizontal objective of maximising the incentives for a cost-effective decarbonisation of the economy. There is a clear trade-off between the objectives. If the risk of carbon leakage due to indirect ETS costs is completely removed, by granting to all sectors potentially exposed to a minimum risk a full compensation of those indirect ETS costs, the competition distortions in the internal market would be very high and the incentives for a cost/effective decarbonisation of the economy created by the ETS system would be removed. On the other hand, if sectors exposed to a significant risk are not eligible to receive enough compensation despite their investments on energy efficiency, they will likely relocate to reduce that cost component and remain on the market. As mentioned in section 2.2 above, the intrinsic characteristics of the concept of carbon leakage show that such trade-off is extremely difficult to quantify with reliable data. The balancing between these objectives must also be in line with Article 107 (3) (c) TFEU and the relevant case-law of the Court of Justice of the European Union. According to that legal framework, to assess whether an aid measure can be considered compatible with the internal market, the Commission analyses whether the design of the aid measure ensures that the positive impact of the aid towards an objective of common interest exceeds its potential negative effects on trade and competition. In assessing the design of the measure, the Commission shall define the need for the State intervention, its appropriateness, proportionality, and the existence of an incentive effect. In this case, the objective of common interest consists in the prevention of the risk of carbon leakage due to indirect ETS costs only. To ensure that the potential negative effects on competition and trade are minimised, the aid measure must be targeted to those sectors that are at a significant risk, in line with Article 10a (6) of the ETS Directive, and the aid amount must be limited to the minimum needed to reduce that risk to an acceptable level. The difficulties of measuring the trade-offs between those objectives highlight the importance of applying a very strict and cautious approach in terms of eligibility and proportionality of this type of aid. In addition, as the size of the risk of carbon leakage due to indirect ETS costs will change with the evolution of carbon prices, the potential for electrification, and the policy choices made by Member States in relation to their energy mix, that approach should also ensure future-proofing. The impact assessment will follow this intervention logic: 4.3.Operational objective The intrinsic characteristics of the concept of carbon leakage already highlighted in section 2.2 cannot be removed and will hence also affect the evaluation of the new guidelines at the end of the Phase IV. The fact that relocation decisions are multifactorial and the difficulty in isolating the impact of indirect ETS costs in those decisions will affect the possibility to verify the achievement of the operational objectives. Any assessment will therefore imply a certain degree of uncertainty. However, it cannot be excluded that a higher carbon price in Phase IV will allow to better isolate and assess the impact of the compensation and therefore developing more precise and refined evaluation methodologies. In that case, it cannot be excluded that operational objectives could be identified and measured. To improve the data gathering that will support the evaluation, the reporting of Member States should be standardised to ensure consistency. The JRC has provided suggestions of the development of a template that all Member States should use. 4.4.Consistency with other EU policies The ETS Guidelines should be consistent with the Green Deal ambitions, including the climate neutrality objective to be reached by 2050. Within the Green Deal framework, the Commission has also adopted the European Industry Strategy, a plan for green and digital transformations of European industry. With a new Industrial Strategy, the Commission aims to make sure that European businesses remain fit to achieve their ambitions and cope with increasing global competition. In addition, the new EU Hydrogen Strategy will give a boost to clean hydrogen production in Europe. The ETS Guidelines are part of the instruments designed to address the risk of carbon leakage faced by certain companies as a result of the EU ETS. The risk of carbon leakage due to direct ETS costs – i.e. the obligation to purchase CO2 certificates – is covered under the ETS Directive by the Carbon Leakage List for 2021-2030. These ETS Guidelines should therefore be consistent with the methodology used in order to establish this carbon leakage list due to direct ETS costs. The Energy Efficiency Directive (EED) of 2012 established a common framework of measures across Member States to ensure the achievement of the EU’s 20% headline target on energy efficiency by 2020, and paved the way for further energy efficiency improvements beyond this date. The impact of the conditionality of the compensation under ETS Guidelines on the consistency with the requirements under the Energy Efficiency Directive will be analysed. 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 the 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); Regulation 2018/1999/EU on the Governance of the Energy Union. Under the Energy Union Strategy and the CEP, the EU has EU-wide headline 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. 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? The baseline from which options are assessed is a “no policy change” scenario. The current 2012 ETS Guidelines will be applicable until 31 December 2020. Therefore the “no policy change” scenario consists of the continuation of the 2012 ETS Guidelines by way of prolongation. The baseline would allow Member States to grant indirect ETS costs compensation to undertakings in the 13 sectors and 7 subsectors listed in Annex II of the 2012 ETS Guidelines. The calculation of the maximum aid amount would continue to follow the formula set out in the 2012 Guidelines. The relevant CO2 emission factors would correspond to the values defined in Annex IV of the 2012 ETS Guidelines, which groups Member States together in geographical regions based on the status of market coupling and the degree of price convergence at the time when the 2012 ETS Guidelines were adopted. The aid intensity would remain at a level of 75%. The baseline output would continue to be determined by reference to the average product at a given installation over the reference period 2005-2011. The calculation would continue to use the EUA forward price defined as the simple average of the daily one-year forward EUA prices (closing offer prices) for delivery in December of the year for which the aid is granted, as observed in a given EU carbon exchange from 1 January to 31 December of the year preceding the year for which the aid is granted. No State aid could be granted in case of electricity supply contracts that do not include any CO2 costs. Moreover, the compensation would not be conditional on the participation in energy management systems or the implementation of energy efficiency investments. Under the baseline scenario, which would cover the Phase IV trading period 2021-2030, Member States would need to notify a prolongation of their existing compensation schemes or the implementation of new compensation schemes, which the Commission would assess in light of the criteria set out in the 2012 ETS Guidelines. 5.2.Description of the policy options In line with the above described problem drivers and specific objectives, several policy options which concern the different elements of the formula (see section 1.2) have been identified complementing the baseline scenario described above. a)Eligibility ·A first set of options (Options A0, A1, A2, A3 and A4) contains criteria to define sectors or subsectors eligible for compensation. The criteria are proxies to assess significant risks of carbon leakage due to indirect ETS costs. b)Estimation of indirect ETS costs

·A second set of options (Options B0 and B1) presents two possibilities related to the determination of the geographical CO2 factor ·A third set of options (Options C0 and C1) presents two possibilities related to the determination of the output of an installation c)Maximum aid amount ·A fourth set of options (Options D0, D1, D2 and D3) concerns the aid intensity, meaning the proportion of indirect ETS costs that would be compensated. ·A fifth set of options (Options E0, E1 and E2) presents several possibilities related to the evolution of the aid intensity, also called the degressivity of the aid intensity d)Conditionality ·A sixth set of options (Options F0, F1, F2 and F3) refers to conditionality, meaning providing the aid only if certain actions are undertaken by the beneficiary. Any combination of the options under A, B, C, D, E and F is in principle possible. 5.2.1.Sector eligibility A first set of options regards the criteria to define eligible sectors, i.e. the sectors most at risk of carbon leakage due to indirect ETS costs. This set of options has evolved during the process, based on the results of an external study and on the submissions received during the consultation activities. 5.2.1.1.Option A0 (Baseline Option): The same sector and subsector eligibility as in the 2012 ETS Guidelines Under the baseline option, the 2012 ETS Guidelines would be prolonged. Accordingly, under option A0 the same 13 sectors and 7 subsectors listed in Annex II of the 2012 ETS Guidelines would continue to be eligible during Phase IV. 5.2.1.2.Option A1: The same sector and subsector eligibility as in the 2021-2030 Carbon Leakage Decision Option A1 is fully based on the method used in the context of compensation for direct CO2 costs (the 2021-2030 Carbon Leakage Decision) i.e. all sectors in the Carbon Leakage List 2021-2030 would be eligible for indirect cost compensation. The Carbon Leakage List 2021-2030 adopted by the Commission for the ETS Phase IV amounts to 50 sectors and 13 subsectors and takes into account the risk of carbon leakage of sectors due to both direct and indirect ETS costs. 5.2.1.3.Option A2: Eligibility of sectors based on the methodology used in the Carbon Leakage List 2021-2030, but calculated based on indirect emission intensity only

Under Option A2, a sector would be deemed to be at risk of carbon leakage due to indirect ETS costs, where its indirect carbon leakage indicator (ICLI) has value of at least 0.2. Option A2 is an adaptation of the methodology used for the 2021-2030 Carbon Leakage Decision taking into account the indirect ETS costs only. It is based on the relation of a sector’s trade intensity and indirect emission intensity (i.e. the ratio of indirect emissions over GVA), as expressed by the “Indirect Carbon Leakage Indicator” (ICLI). Under option A2, 24 sectors would be eligible, as their trade intensity multiplied by their indirect emission intensity exceeds 0.2. 5.2.1.4.Option A3: Eligibility of sectors based on a strict adaptation of the methodology used in the Carbon Leakage List 2021-2030 Option A3 is based on a strict adaptation of option A2, in order to further restrict the eligible sectors to the ones with the highest carbon leakage risk due to indirect ETS costs. Under this option, in addition to presenting an “indirect carbon leakage indicator” above 0.2 as in option A2, the following minimum thresholds as regards both a sector’s level of trade intensity and its indirect emission intensity are applied: -a trade intensity of at least 20% -an indirect emission intensity of at least 1 kgCO2/EUR These thresholds were set on the basis of the findings of an external study from Roques and Laroche, that all sectors with a “high” or “medium-high” risk of carbon leakage due to emission costs showed a trade intensity above 20% and an indirect emission intensity above 1kg CO2/EUR, confirming the relevance of these thresholds for eligibility. By applying those minimum thresholds, 10 sectors would be eligible: 14.11 Manufacture of leather clothes, 24.42 Aluminium production, 20.13 Manufacture of other inorganic basic chemicals, 24.43 Lead, zinc and tin production, 17.11 Manufacture of pulp, 17.12 Manufacture of paper and paperboard, 24.10 Manufacture of basic iron and steel and of ferro-alloys and 19.20 Manufacture of refined petroleum products. According to the same study, four sectors would be borderline: 24.51 casting of iron, 24.44 Copper production, 20.16 Manufacture of plastics in primary forms and 24.45 other non-ferrous metal production have all been defined as being at “medium” risk of carbon leakage due to indirect ETS costs. Under option A3, 2 of these 4 sectors: 24.44 Copper production and 24.45 other non-ferrous metal production would also be eligible. Indeed, the quantitative parameters exclude sectors which do not meet the 1kg CO2/EUR threshold of indirect emission intensity but which have an ICLI above 0.2. However, 24.44 Copper production and 24.45 Other non-ferrous metals production have specific characteristics that distinguish them from other borderline sectors. The specificities of these two sectors are assessed in detail in section 6.1.2 below. 5.2.1.5.Option A4: Eligibility of sectors based on a strict adaptation of the methodology used in the Carbon Leakage List 2021-2030 and subsectors presenting a high level of fuel and electricity substitutability Option A4 is based on the methodology for sector eligibility in Option A3, but extends the eligibility at subsector level. This extension is limited to subsectors presenting an ICLI above 0.2 and with fuel and electricity substitutability as determined in the Commission’s list on fuel electricity substitutability Under Option A4, 10 sectors (14.11 Manufacture of leather clothes, 24.42 Aluminium production, 20.13 Manufacture of other inorganic basic chemicals, 24.43 Lead, zinc and tin production, 17.11 Manufacture of pulp, 17.12 Manufacture of paper and paperboard, 24.10 Manufacture of basic iron and steel and of ferro-alloys, 19.20 Manufacture of refined petroleum products, 24.44 Copper production and 24.45 Other non-ferrous metal production) and 20 subsectors (20.16.40.15 polyethylene in primary forms; all 15 product categories in the 24.51 casting of iron sector; 23.14.12.10 glass fibre mats and 23.14.12.30 glass fibre voiles; and 20.11.11.50 hydrogen and 20.11.12.90 inorganic oxygen compounds of non-metals) would be eligible. Option A4 builds upon the same reasoning and underlying analysis of Option A3, both in terms of quantitative parameters (ICLI, trade intensity, emission intensity), and in terms of qualitative considerations (ability to pass on indirect ETS costs, profit margins, abatement potential and fuel/electricity substitutability). All sectors that would be included under Option A3 would therefore also be included in Option A4. It also targets the problem of future electrification, which could be discouraged in the absence of compensation for indirect ETS costs. It therefore foresees the addition of subsectors based on their ICLI and their fuel and electricity substitutability. 5.2.2.Estimation of indirect ETS costs As stated in section 1.2, the compensation formula is made of a parameter that defines the calculation of the compensation amount (aid intensity and its evolution over time) and several parameters that estimate indirect ETS costs (output, CO2 factor, EUA price). In order to avoid under or over-compensation, it is crucial to estimate as correctly as possible the indirect ETS costs affecting undertakings. Indirect ETS costs can be estimated by combining the carbon content of electricity and the production level: -A second set of options (B0 and B1) relates to the calculation of the CO2 factor.

-A third set of options (C0 and C1) concerns the calculation of an undertaking’s output. 5.2.2.1.CO2 emission factor As stated above, the maximum amount of aid depends on the CO2 emission factor, which reflects for a given geographical area the average amount of CO2 (in tonnes) emitted for the production of one MWh of electricity setting the marginal price. In the formula, the CO2 emission factor has the effect of modulating the maximum amount of aid depending on the energy mix in the area where the installation receiving the aid is established. Such regional differentiation reflects the significance of fossil fuel plants for the final price set on the wholesale market and their role as marginal plants in the merit order. Under the current ETS Guidelines, the areas were defined as geographic zones (a) which consist of submarkets coupled through power exchanges, or (b) within which no declared congestion exists and, in both cases, hourly day-ahead power exchange prices within the zones showing price divergence in euros (using daily ECB exchange rates) of maximum 1% in significant number of all hours in a year. a) Option B0 (Baseline Option): CO2 factors defined at regional level as set out in Annex IV of the 2012 ETS Guidelines Under the baseline option B0, the CO2 factors listed in Annex IV of the 2012 ETS Guidelines continue to be applicable for the same regions: Nordic (Denmark, Sweden, Finland and Norway), Central-Western Europe (Austria, Belgium, Luxembourg, France, Germany and Netherlands), Iberia (Portugal, Spain), Central-Eastern Europe (Czechia and Slovakia) and all other Member States separately. b) Option B1: Updated regions based on recent data on price convergence Under Option B1, differentiated regional CO2 emission factors would apply, until a Midterm update of the CO2 factors. The relevant geographic areas would be updated by applying the same methodology as under the 2012 ETS Guidelines, i.e. on the basis of the development of market coupling and the degree of price convergence. These criteria would result in the following geographic areas: A revised Nordic zone (Sweden and Finland), a revised Central-Western Europe zone (Austria, Germany and Luxembourg), Iberia (Portugal, Spain), Central-Eastern Europe (Czechia and Slovakia), a new Adriatic zone (Slovenia and Croatia) and a new Baltic zone (Lithuania, Latvia, Estonia). For all other Member States, a national emission factor would apply. The calculation of the CO2 factors per region would be based on the most updated methodology, as described in section Error! Reference source not found.. 5.2.2.2.The installation’s output The installation’s output value used for the calculation of indirect ETS costs per undertaking means the average production at a given installation over a reference period, expressed in tonnes per year. a) Option C0 (Baseline Option): Historical output with reference year 2005-2011 Under the baseline option C0, the output used in the compensation formula would be determined by reference to the average production at a given installation over the reference period 2005-2011 (“baseline output”). Changes in production capacity (either upward or downward) between the reference period and the year of compensation would trigger a change in the baseline output used in the compensation formula, similar to the provisions laid out in the 2012 ETS Guidelines. b) Option C1: Actual output Under option C1, the aid amount would be calculated taking into account the installation’s actual production in year t-1, determined ex post in year t. 5.2.3.Maximum aid amount As stated in section 1.2, the compensation formula is made of parameters estimating indirect ETS costs (output, CO2 factor, EUA price) and a parameter defining the calculation of the compensation amount (aid intensity and its evolution over time). The aid intensity describes the maximum share of indirect ETS costs that a Member State can compensate. The aid intensity and the degressivity of the aid are key elements determining the proportionality of the aid to be granted for compensation of indirect ETS costs. A fourth set of options (D0, D1, D2 and D3) relates to the aid intensity set at the start of the trading period 2021-2030.

A fifth set of option (E0, E1 and E2) concern the evolution of the aid intensity over time. 5.2.3.1.Aid intensity a) Option D0 (Baseline Option): Aid intensity of 75% Under the baseline option, the 2012 ETS State aid Guidelines would be prolonged. Accordingly, option D0 would result in an aid intensity of 75% at the start of Phase IV. b) Option D1: Aid intensity higher than 75% Under Option D2, the aid intensity at the start of the trading period 2021-2030 would be set at a level higher than 75%. c) Option D2: Aid intensity lower than 75% Under Option D2, the aid intensity at the start of the trading period 2021-2030 would be set at a level lower than 75%. d) Option D3: aid intensity of 75% combined with the possibility of a GVA cap Under Option D3, Member States would have the possibility to combine an aid intensity of 75% with the introduction of a cap on the total amount of the indirect ETS costs that beneficiaries would have to support as a percentage of the undertaking's gross value added (“GVA”). This further modulation aims at better capturing sector specificities. 5.2.3.2.Degressivity The following options relate to the evolution of the level of aid intensity over time to capture potential reductions of the electricity consumption of the eligible sectors. In the formula, the compensation is calculated on the basis of the product-specific electricity consumption per tonne of output achieved by the most electricity-efficient methods of production for the product considered. The electricity consumption efficiency benchmarks will be updated at the beginning of the fourth ETS trading period. In that context, the methodology will be aligned with Article 10a (2) of the EU ETS Directive. Under this methodology, the Commission would extrapolate an annual reduction rate for each benchmark based on past efficiency improvements. a) Option E0: Stable aid intensity Under the baseline option, the 2012 ETS Guidelines would be prolonged. Accordingly, option E0 would result in a stable aid intensity throughout Phase IV. b) Option E1: Stable aid intensity with mid-term update of efficiency benchmarks Option E1 would not set any degressivity of the aid intensity. The aid intensity would remain stable at a defined level. A stable aid intensity would be correlated with a mid-term update of the efficiency benchmarks after five years, to capture the actual reduction of electricity consumption of eligible sectors over time. c) Option E2: Degressive aid intensity

Under Option E2, the aid intensity would be degressive. While the aid intensity as defined at the start of the fourth trading period would remain at that level for the years 2021-2024, it would decrease by 5 percentage points in 2024 and by an additional 5 percentage points in 2027, to capture theoretical reduction of electricity consumption of eligible sectors over time. 5.2.4.Conditionality This impact assessment also addresses the possibility of making the compensation conditional upon certain activities that could reduce the size of the problem. By making the aid conditional upon decarbonisation efforts, the initiative may contribute to reaching the horizontal objective of maximising the incentives for a cost-effective decarbonisation of the economy. a)Baseline Option F0: No Conditionality Under the baseline option F0, the 2012 ETS Guidelines would be prolonged. Indirect ETS cost compensation would not be conditional. b)Option F1: Limited conditionality Under Option F1, the indirect ETS costs compensation would be conditional upon the demonstration that the beneficiary complies with the obligation to conduct an energy audit under Article 8(4) of the Energy Efficiency Directive (EED), only if applicable, either as a stand-alone energy audits or within the framework of certified Energy Management System or Environmental Management System. c)Option F2: Extended conditionality Under Option F2, the indirect ETS costs compensation would be conditional upon the demonstration that the beneficiary complies with the obligation to conduct an energy audit under Article 8 (4) of the Energy Efficiency Directive (EED), including undertakings not covered by that obligation under the EED (SMEs). In addition, an undertaking covered by the obligation to conduct an energy audit under Article 8 (4) of the Energy Efficiency Directive (i.e. large undertaking) would also have to demonstrate that it implements the recommendations made in the framework of the energy audit, to the extent that the payback time for the relevant investments does not exceed 5 years and that the costs of their investments is proportionate. Alternatively, the beneficiary would have to demonstrate that it has reduced the carbon footprint of their electricity consumption, for example, through installing an on-site renewable energy generation facility (covering at least 50% of their electricity needs), through a carbon-free power purchase agreement; or alternatively that it has invested a significant share of at least 80% of the aid amount in projects that lead to substantial reductions of the installation’s greenhouse gas emissions and well below the applicable benchmark used for free allocation in the EU Emissions Trading System. d)Option F3: Intermediate conditionality Under Option F3, an undertaking covered by the obligation to conduct an energy audit under Article 8 (4) of the Energy Efficiency Directive (i.e. large undertaking) would have to demonstrate that it implements the recommendations made in the framework of the energy audit, to the extent that the payback time for the relevant investments does not exceed 3 years and that the costs of their investments is proportionate. Alternatively, the beneficiary would have to reduce the carbon footprint of their electricity consumption so as to cover at least 30% of their electricity consumption from carbon-free sources; or alternatively that it has invested a significant share of at least 50% of the aid amount in projects that lead to substantial reductions of the installation’s greenhouse gas emissions and well below the applicable benchmark used for free allocation in the EU Emissions Trading System. 5.3.Options discarded at an early stage 5.3.1.Discontinuation of the ETS Guidelines An option discarded at an early stage is the discontinuation of the ETS Guidelines. Under this option no State aid Guidelines for indirect ETS cost compensation would exist during Phase IV. Consequently, the Commission would assess the compatibility of national compensation schemes directly under Article 107 (3) (c) TFEU. The evaluation of the 2012 ETS Guidelines conducted in parallel to this Impact Assessment however has confirmed the relevance of the ETS Guidelines as a means to give guidance to Member States when designing their compensation schemes and to ensure thereby that national compensation schemes tackle the risk of carbon leakage due to indirect ETS costs, while at the same time limit to necessary in order to the risk of competition distortions in the internal market. Finally, such option would have been contrary to the revised ETS Directive, which in its Article 10a (6) states that national compensation schemes should be applied in accordance with State aid rules and therefore assumes the existence of State aid Guidelines during Phase IV. 5.3.2.CO2 factors As presented in the options, the Commission reflected on whether national or EU-wide CO2 factors would be more appropriate than the regional approach as in 2012 Guidelines.

a)EU-wide CO2 factor An EU-wide CO2 emission factor would not differentiate between markets depending on their energy mix. As illustrated by Figure 2 below, a European emission factor would, only for a few Member States (in particular Denmark and Finland), reflect the national carbon content of the electricity consumed. The average EU wide CO2 emission factor for Member States and Norway for 2018 is 0.67 tCO2/MWh. As illustrated by Figure 2 below, such European emission factor would have an impact for most countries, as it would deviate in most cases from the national emission factor observed for the respective Member States. Whether the European emission factor is higher or lower than the current emission factor, depends on the energy mix of the relevant Member State. EU wide emission factor would either overestimate or underestimate the carbon content of the respective national electricity production. As regards States for which the EU wide emission factor significantly falls short of the national emission factor, this option increases the risk of carbon leakage to the extent that the EU wide emission factor may underestimate the carbon content of the electricity consumed. As regards States for which the EU wide emission factor is significantly higher than the national emission factor, this option increases the risk of competition distortion by compensating undertakings with an amount higher than the actual indirect ETS costs. Source: Eurostat, Compass Lexecon calculations b)National CO2 factor National emission factors reflect the production mix of fossil fuels generation plants in a given Member State. It is the result of the division of the CO2 equivalent emission data of the energy industry divided by the gross electricity generation based on fossil fuels in TWh. The national emission factor therefore serves as a proxy of the carbon intensity of the electricity consumed in each Member State. They thus allow a calculation of the indirect ETS costs passed on via the electricity prices in a given Member State. Prima facie, national emission factors seem to be well targeting the actual carbon leakage risk that sectors face in a given Member State due to their exposure to indirect ETS costs. However, the indirect ETS costs supported by electricity consumers in a given Member State not only depend on the production mix of this Member State but can also depend on the production mix of neighbouring Member States and the degree of cross-border capacity. Where cross-border capacity is not limited, the electricity price is set by the marginal fossil-fuel plant of both the relevant area. The level of price convergence between Member States serves as an indicator of the extent to which the production mix of one Member State is capable of influencing the electricity price of another. Solely relying on purely national emission factors does not allow to take these cross-border effects into account. This entails the risk that a national emission factor might not adequately reflect the indirect ETS costs actually passed on via the electricity price. This is particular true where the Member State in question has a high level of price convergence with a neighbouring Member State. To the extent that national emission factors thus underestimate the carbon content of the electricity consumed in a given Member State, this option might contribute to an increase of the risk of carbon leakage compared to an option where the cross-border effects described are captured. c)Options discarded regarding CO2 factors In response to the public consultation, slightly more than 10% of respondent would favour the use a national factor. Also, only a minority argued that an EU-wide factor would be adequate to address the risk of carbon leakage due to indirect ETS costs (12.10%). More than 50% of respondents to the public consultation favoured regional CO2 factors. In reply to the targeted consultation to Member States, some of the Member States already having a national CO2 factor under the 2012 ETS Guidelines stressed the importance of maintaining it at national level for their own country (Greece, Spain, Hungary, Poland, Romania, and Slovakia). This can be explained by the fact that, in those Member States, the electricity mix is rather carbon intensive. Only two Member States (France and Czechia) argued in favour of an EU-wide CO2 factor. While for France, that factor would positively address the risk of carbon leakage, for Czechia it would be the opposite case. As explained above, both the national and the EU-wide factors would risk not reflecting properly the carbon content of the electricity consumed. National CO2 factors would not address properly the carbon-content of electricity consumed in Member States strongly interconnected with each other and could result in both under or over-estimation of indirect ETS costs. An EU-wide factor would also result in both under and over-estimation of indirect ETS costs, depending on the Member States considered – as shown by Figure 2 Error! Reference source not found. . Any potential under-compensation could would risk not to be sufficient to address the actual risk of carbon leakage due to indirect ETS costs and would increase the risk for a shift of CO2 emissions to less carbon-restricted areas outside of the EU. Any potential over-compensation would result in higher competition distortions and could reduce incentives for energy efficiency. In the light of the findings above, the Commission has discarded these options and has decided to focus the policy choices on regional factors, in order to better reflect indirect ETS costs and avoid under or over-compensation.

5.3.3.Output The Commission also reflected on using historical data calculated over 2013-2020, with similar adjustments to the baseline output as envisaged in the 2012 ETS Guidelines (historical output), or a combination of these historical data with a cap set at the actual output (historical output, but capped by actual output). However, even though the aid amount would then be determined on a more recent timeframe compared to the baseline approach, it would suffer from similar shortcomings, i.e. not fully reflect actual changes in production of undertakings. By using historical data with a cap set at the actual output level, the risk of undercompensation remains since compensation can be delivered based on a baseline output below the actual output in year n-1. Potential overcompensation would however be addressed since the minimum between actual output and baseline output is taken to compute the aid amount. Therefore, the use of historical output data risks not fully addressing carbon leakage risks by potentially compensating undertakings below the necessary level to prevent carbon leakage. Also, small changes in production that would not trigger capacity changes would not be accounted for, thus not removing entirely the risk for distortions. For these reasons, the Commission has discarded these options by not including the use of output data based on historical output in the packages considered. 5.4.From options to packages Two different packages of policy options have been created for the purpose of the analysis. 5.4.1.Packages of policy options to determine the indirect ETS costs Any combination of the options B and C is theoretically possible. To facilitate the comparison of the options, this report sets out two Option Packages relevant in view of the wide range of stakeholder input. Under the Baseline Approach, the indirect ETS costs are estimated based on CO2 factors defined at regional level as set out in Annex IV of the 2012 ETS Guidelines comprises (option B0) and based on historical output with reference year 2005-2011 (option C0). Under the Updated Approach, the indirect ETS costs are estimated based on updated CO2 factors defined at regional level (option B1) and based on updated output data (option C1). 5.4.2.Packages of policy options to determine the maximum aid amount Any combination of the options D and E is theoretically possible. To facilitate the comparison of the options, this report sets out four option packages (all of which can be considered illustrative and relevant in view of the wide range of stakeholder input). A Baseline Package corresponds to the prolongation of the existing Guidelines and comprises a stable (option E0) aid intensity at 75% (option D0). A Minimalist Package aims at maximising the ETS efficiency objective. It combines an aid intensity < 75% (option D2) with a degressive evolution of the aid intensity (option E2). A Maximalist Package aimed at preventing carbon leakage risks to the maximum extent. It comprises a stable (option E0) aid intensity > 75% (option D1).

A Flexible Package is a combination of stable aid intensity with update of efficiency benchmarks (option E1) and an aid intensity at 75% with GVA-cap (option D3). 6.What are the impacts of the policy options? In this section the impacts of the implementation options are compared to the ‘Baseline’ and assessed in terms of achieving the general and specific objectives. Each set of options is assessed separately. Impact Description Economic and social impact – carbon leakage Should the Guidelines be excessively strict as regards which sectors are eligible for compensation or as regards the maximum compensation amounts, this could result in carbon leakage (e.g. via the relocation of economic activity outside the scope of the EU ETS or via investment plans that would not take place within the EU borders). Carbon leakage, should it materialise, would entail lower economic activity and employment in the EU. The impact of the options therefore depends: (i) on the probability of relocation outside the scope of the EU ETS of sectors at significant risk; and (ii) the impact on employment and GVA that would be lost in case such relocation materialises. The environmental, economic and social impacts of carbon leakage are inextricably tied together. Economic and social impact – competition distortion In any eligible sector, companies that do not receive compensation, e.g. because not all Member States grant compensation, compete with companies that benefit from it (intra-sector competition). Moreover, competition between companies active in sectors producing substitutable products might be distorted by the measure (inter-sector competition). Environmental impacts Carbon leakage, if it occurs, would shift direct and indirect CO2 emission to less carbon-restricted areas outside the EU, undermining the effectiveness of the EU ETS. At the same time, a too generous compensation system would have a negative impact on the incentives for industries to further decarbonise their production process by reducing their electricity consumption, i.e. by implementing energy efficiency measures. Also, if sectors/subsectors eligible for direct costs compensation are able to switch production from fuel to electricity, their non-eligibility for indirect ETS costs compensation could result in the unintended behaviour of companies maintaining their fuel consumption to get compensation for direct costs while they could have electrified their production process and decreased overall CO2 emissions. Climate policies, energy efficiency and deployment of renewable energy such as wind and solar is generally correlated with air quality improvements and bring also co-benefits on human health. Measures to reduce energy consumption, reduce GHG emissions and leakages are therefore positive for air quality and human health. Impacts on SMEs The assessment of the policy options will be detailed when they have a specific impact for SMEs. For each option related to eligibility (see section 6.1 below) and aid intensity (see section 6.3 below), the compensation budget, the corresponding indirect emissions and electricity consumption has been estimated based on several assumptions. The methodology used for those estimates is described in Appendix 7: Quantification of options . The Appendix also shows the full overview of those estimates. It should however be stressed that the overall compensation budget only very partially describes the impact on the risk of carbon leakage of the different policy choices made. This is because these overall amounts hide the distribution of the compensation among sectors and among Member States. The distributional effects of an excessively long sector list in terms of the resulting carbon leakage risk cannot be outweighed by a strict calculation of the aid intensity. The resulting overall combination may indeed lead to the same overall total compensation budget; but this would be achieved by withholding compensation from some sectors with a higher risk whilst granting unnecessary compensation to other sectors at lower risk. For this reason, the assessment of the impact of those options and packages on the risk of carbon leakage is mostly based on a qualitative analysis. 6.1.Impacts of the options on sector eligibility 6.1.1.Methodology 6.1.1.1.Screening based on quantitative criteria The Commission first created a list of sectors which could potentially be subject to a carbon leakage risk due to indirect ETS costs. This list was the basis for identifying the sectors on which further work to quantify the actual carbon leakage risk was carried out. The starting point for creating this list was the “Indirect Carbon Leakage Indicator” (ICLI) of the sectors concerned, obtained as the product of a sector’s trade intensity and its indirect emission intensity. The calculation of the indirect carbon leakage indicator was performed based on the same data collected for the creation of the Carbon Leakage List for 2021-2030. In order to assess carbon leakage risk due to indirect ETS costs, all relevant sectors have been ranked according to their ICLI. The ICLI is a relevant metric for this pre-selection as it is determined by the sectors’ trade intensity (which has an impact on how easy and likely it is to shift production) and indirect emission intensity (which reflects the impact which indirect ETS costs have on the sectors’ business). At the same time, the ICLI has limitations. In particular, being a function of two different parameters, a high ICLI does not necessarily indicate that companies in that sector will relocate due to significant indirect ETS costs. In particular, as noted by Roques and Laroche, the ICLI metric tends to overestimate the risk of the sectors with high trade intensity (which could sometimes be related to exports and not imports) but with low exposure to indirect carbon costs. All sectors with an ICLI above 0.15 have been preselected. The threshold of 0.15 corresponds to the threshold used for eligibility for qualitative assessment used for the Carbon Leakage List 2021-2030. In addition, the Commission preselected one sector (05.20 Mining of lignite) which had an Indirect Emission Intensity above 1.5 and five more sectors meeting the following two objective requirements: (i) they should have participated by sending a contribution to the targeted consultation to sectors; and (ii) they should have been included in the sectors in the Carbon Leakage List 2021-2030. In total, 41 sectors were preselected and ranked according to their ICLI. 6.1.1.2.Qualitative assessment

As a second step, the Commission has analysed from a qualitative perspective the potential carbon leakage risk due to indirect emission costs for these preselected sectors. This assessment was conducted using a wide range of sources, including external studies, the conclusions of the evaluation, evidence and opinions gathered by literature review, public and targeted consultation of stakeholders, and official Eurostat data. The assessment was based on three criteria – market characteristics, profit margins and abatement potential. This assessment has been supplemented by an evaluation of the sector’s potential for shifting production processes from fuel to electricity consumption (“electrification”) in order to determine whether the sector should be granted a compensation not to dissuade such shift when it already receives compensation for direct ETS costs (free allowances). These four parameters have been characterized as representing a low/medium/high risk of carbon leakage due to indirect ETS costs; a classification Red / Amber / Green has been used to illustrate the carbon leakage risk. These four parameters are assessed based on the current situation, but also on the basis of forward looking parameters, as explained below.

Market characteristics: This criterion examines the extent to which producers can pass on cost increases to customers, and in particular the ability to pass on higher electricity costs to customers. To this end, several criteria have been assessed for each sector: the bargaining position of the sector, the price taker position, the level of concentration/competition in the market (intensively competing producers vs monopolistic position, intensively competing clients), and existing and future trading patterns (including domestic demand, import penetration, import prices – in absolute levels and trends). The assessment takes into account both the current ability to pass on costs as well as the future outlook. Based on this criteria, a sector is deemed to be at high risk of carbon leakage, where it cannot pass-on the indirect ETS costs to its customers, at medium risk when it has some ability to pass through indirect ETS costs and at low risk when it can fully pass through all the indirect ETS costs to its customers. Profit margins: This criterion concerns the incentives of a sector for long-term investment in the EU ETS, the current and future profitability of the sector in the EU ETS taking into account the current and future profit margins in the zone covered by ETS. To this end, parameters such as the current and future demand, output price, costs, investment, business demography of the sector, substitutability with other products and the feasibility of relocation for the sector have been assessed. If profit margins are positive and sustained, then the risk of relocation due to indirect ETS costs can be considered to be low. Whereas if profit margins are low or margins are higher in third countries outside the EU ETS zone, and the indirect ETS costs related to the ETS are a significant share of the profit margins, then the risk of relocation due to indirect ETS costs is high. Abatement potential: The abatement potential of a sector relates to a sector’s ability to mitigate the risk of carbon leakage when incorporating new technologies. This criterion assesses the scope for energy efficiency investments in order to reduce electricity consumption in the sector. To this end, parameters such as the current electricity consumption, international benchmarks and the current and future adoption of future Best Available Technologies (“BAT”) are used. For sectors where there is little scope for further reduction of electricity consumption, and hence exposure to indirect ETS costs, the risk of carbon leakage will be higher than for sectors that can still adopt the best existing technologies to reduce their electricity consumption. Fuel and electricity substitutability: Some production processes can, to a certain extent, shift from fuel to electricity consumption in their production processes. However, the increase in electricity costs related to the EU ETS means that certain sectors might not shift their consumption to electricity in the absence of compensation for indirect ETS costs, as they prefer maintaining their compensation for direct emissions costs linked to their fuel consumption. Against this background, this criterion assesses the ability of the sector to shift from fossil fuel energies to electricity and whether there is a risk that difference in treatment between direct and indirect cost compensation hinders the energy-efficient electrification of the sector. The qualitative assessment of each sector was complemented with sensitivities to carbon price under a low price scenario of 15 €/tCO2, a baseline scenario of 25 €/tCO2 and a high price scenario of 35€/tCO2. The assessment was based on the assumption that the same countries that have implemented an ETS indirect cost compensation scheme during Phase III will also implement such scheme during Phase IV. The evaluation has shown that 12 Member States and Norway have decided to implement compensations schemes. All schemes cover all eligible sectors and with the exception of Finland, all compensation schemes aim at granting the maximum aid amount as foreseen by the 2012 ETS Guidelines within the budgetary limits that Member States and Norway may establish. The assessment assumed that Member States and Norway will continue to grant maximum aid to all eligible sectors. The overall risk rating of a sector is established on the basis of the risk rating of each of the four criteria described above (market characteristics, profit margins, abatement potential, and fuel and electricity substitutability). The conclusion of the carbon leakage risk’s assessment for each of the sectors by Roques and Laroche is presented in Appendix 3: Assessment of carbon leakage risk for each sector . The key assumption for the calculation of the overall risk of a sector is the higher weight given to the market characteristics criterion as it is considered that a sector which can fully pass through its indirect ETS costs can manage the risk of carbon leakage. Therefore, the market characteristics criterion bears a weight of 2 and both profit margins and abatement potential a weight of 1, i.e. the last two criteria combined have the same importance as the first one in the final rating. The fuel and electricity substitutability criterion is treated differently: if the risk rating on the fuel and electricity substitutability criterion is high, the overall risk rating of the sector will be increased (see Appendix 4 - last column in Table 5 ) 6.1.1.3.Data availability, consultation activities and data limitations First, as the analysis is based on data collected for the purpose of the establishment of the Carbon Leakage List 2021-2030 covering the period 2013-2015, it shares the same limitations. In particular, electricity consumption data at sectoral level (NACE-4) used under ETS Directive in the context of the carbon leakage is not officially available at Eurostat and has therefore been collected from Member States and EEA via a data collection exercise. In that context, 17 Member States submitted the relevant electricity data (NACE-4 level) by the deadline. The coverage of the data collection resulted in ca. 70% of total indirect emissions covered. Some stakeholders located in Member States that have not participated to the data collection complained during the consultation that the dataset did not include data from all Member States in the context of the consultation activities. However, as explained in the impact assessment on the Carbon Leakage List 2021-2030, that dataset was subject to several robustness checks, including analysis of previous Carbon Leakage List exercise, comparing with other data sources, Member States clarifications, aiming to get the highest possible accuracy. Second, the assessment is based on Eurostat statistics at sector level, corresponding to a NACE-4 level. NACE is the nomenclature of economic activities in the EU. NACE is a four-digit classification providing the framework for collecting and presenting a large range of statistical data according to economic activity in the fields of economic statistics. A frequent feedback received during the public and targeted consultations is that relying on NACE-4 level data means that the assessment includes all subsectors – with disparities among them in terms of electro-intensity and hence, does not take into account the specificities of different economic activities within the same sector. However, the NACE-4 nomenclature is the basis for Eurostat to develop and certify official statistics. Carrying out an analysis at NACE-4 level is therefore a guarantee for a sector analysis on a credible and uniform factual basis, which does not rely on unverified data. In addition, data regarding employment and economic activity are also available at NACE-4 level only. Besides these data, the assessment relies on various sector specific reports from independent sources as well as the responses submitted to the consultation activities. In particular, a very important source of data came from the replies to the sector targeted consultation launched by the Commission on 13 February 2019 until 09 April 2019. That questionnaire listed the quality criteria for data submission in terms of representativeness, robus