COMMISSION STAFF WORKING DOCUMENT EVALUATION Accompanying the document Impact assessment on Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post 2021
Date: 2020-09-21
Institutions: Directorate-General for Competition, European Commission
Subjects: EU emission allowance, State aid, electrical energy, energy consumption, greenhouse gas, industrial pollution, modernisation of industry, price of energy, reduction of gas emissions, tradeable emission permit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.9.2020  SWD(2020) 194 final  COMMISSION STAFF WORKING DOCUMENT EVALUATION Accompanying the document Impact assessment on Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post 2021    {C(2020) 6400 final} - {SEC(2020) 320 final} - {SWD(2020) 190 final} - {SWD(2020) 191 final} - {SWD(2020) 192 final} - {SWD(2020) 193 final} - {SWD(2020) 195 final}  
 
 
Table of contents 

1. 

INTRODUCTION ................................................................................................................................ 5 

1.1.  Context and purpose of the evaluation................................................... 5 
1.1.1.  The EU ETS ...................................................................................... 5 

1.1.2.  The 2012 ETS Guidelines (2013-2020) ........................................................ 6 

1.1.3.  The revised ETS Directive (2021-2030) ....................................................... 7 

1.1.4.  Clean Energy Package .......................................................................... 7 

1.1.5.  The Green Deal Communication ............................................................... 8 

1.1.6.  The New Industrial Strategy for Europe ...................................................... 8 

1.2.  Scope of the evaluation ....................................................................... 8 

2. 

BACKGROUND TO THE INTERVENTION ................................................................................... 10 

2.1.  Description of the intervention and its objectives ................................... 10 
2.1.1.  General objective ............................................................................... 10 

2.1.2.  Specific objectives ............................................................................... 11 

2.1.3. 

Intervention logic ............................................................................... 12 

2.2.  Baseline and points of comparison ....................................................... 14 

3. 

IMPLEMENTATION / STATE OF PLAY ........................................................................................ 15 

3.1.  Description of the current situation ...................................................... 15 

4.  METHOD............................................................................................................................................ 19 

4.1.  Short description of data collection and assessment methods .................. 19 
Limitations and robustness of findings .................................................. 20 
4.2. 

5.  ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONS .......................................... 22 

5.1.  OVERVIEW OF THE EVALUATION QUESTIONS ........................................................................... 22 

5.2.  Relevance ......................................................................................... 22 
Implementation of ETS costs compensation schemes over the third trading period ... 23 

5.2.1. 

Level and evolution of electricity prices .......................................................... 23 
Industry structure ....................................................................................... 26 
Trade exchanges ......................................................................................... 28 
5.2.2.  Evolution of the legal and economic frameworks over the third trading period ........ 29 

5.2.3.  Conclusion ....................................................................................... 31 

5.3.  Effectiveness ..................................................................................... 31 
5.3.1.  Minimisation of carbon leakage ............................................................... 32 

5.3.2.  Prevention of competition distortions ........................................................ 36 

5.3.3.  Preservation of the incentive for cost effective decarbonisation of the economy ........ 37 

5.3.4.  Horizontal issues ................................................................................ 39 

5.3.5.  Conclusions ...................................................................................... 43 

5.4.  Efficiency .......................................................................................... 44 
5.5.  EU added value.................................................................................. 45 
5.6.  Coherence......................................................................................... 47 
5.6.1.  Coherence  with  the  objectives  of  the  Green  Deal  Communication  and  the  New 
Industrial Strategy for Europe Communication ...................................................... 47 

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5.6.2.  Coherence with other interventions .......................................................... 48 

6. 

CONCLUSIONS ................................................................................................................................. 49 

APPENDIX A ............................................................................................................................................... 52 

Literature review on carbon leakage .............................................................. 52 
1. Evidence for carbon leakage – short-term aspects .................................................... 52 

2. Evidence for carbon leakage – long-term aspects ..................................................... 53 

3. Carbon leakage rates at higher CO2 prices ............................................................. 54 

4. Carbon pricing outside the EU ......................................................................... 56 

APPENDIX 2 - FINDINGS ABOUT EU ELECTRICITY PRICES ............................................................ 59 

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Table of Figures 

Figure 1: Overall intervention logic .............................................................................................. 14 
Figure 2: EU ETS CO2 Emissions and annual cap vs. EUA prices ............................................... 14 
Figure 3: EUA closing prices ........................................................................................................ 15 
Figure 4: Indirect ETS costs compensation schemes .................................................................... 16 
Figure 5: Electricity prices including all taxes and levies in €/KWh with all taxes and levies for 
large industrial consumers - year 2017 .......................................................................................... 23 
Figure 6: Evolution of electricity prices including all taxes and levies for Member States that 
have implemented a compensation scheme in 2013 - €/KWh ...................................................... 25 
Figure 7: Composition of small (IB) and large (IF) industrial prices in 2017 ............................... 26 
Figure 8: Electricity consumption over GVA ............................................................................... 27 
Figure 9: GVA of eligible sector under the 2012 ETS Guidelines over total Member States 
industrial GVA- year 2016 ............................................................................................................ 27 
Figure 10: Evolution of the carbon prices in the EU ETS market (2015-2019) ............................ 29 
Figure 11: Benchmark of carbon price projections (2021-2030) .................................................. 30 
Figure 12: European, US, Chinese and Japanese retail electricity prices for industry .................. 33 
Figure 13: Total greenhouse gas emissions (including international aviation and indirect CO2, 
excluding LULUCF) trend, EU-28, 1990–2017 (Index 1990 = 100) ............................................ 38 
Figure 14: Day-ahead price convergence in Europe – 2008–2017 (% of hours) .......................... 39 
Figure 15: overview of replies to question 10 “how do administrative costs incurred by the aid 
application compare with the actual amount of compensation received?” ................................... 44 
Figure 16: overview of replies to question 14 of the public consultation on the usefulness of 
having ETS Guidelines in place .................................................................................................... 46 
Figure 17: Summary map of regional, national and subnational carbon pricing initiatives 
implemented, scheduled for implementation and under consideration as of 2018 ....................... 56 
Figure 18: Composition of EU electricity price ............................................................................ 59 
Figure 19: Electricity prices including all taxes and levies for Member States that have 
implemented a compensation at a later stage during phase 3 - €/KWh ......................................... 59 
Figure 20: Average electricity prices including all taxes and levies for Member States that have 
not implemented a compensation schemes - €/KWh .................................................................... 60 
Figure 21a and 21b: Comparison of producer price index and electricity price (including all taxes 
and levies) changes - 2009-2013 (on top) and 2013-2017 (below) ............................................... 60 
Figure 22: Financial support to interruptible load schemes in some EU Member States.............. 62 
Figure 23: Composition of taxes and levies on prices for small (IB) and large (IF) industrial 
consumers (2008-2017) ................................................................................................................. 62 
Figure 24: Industry GVA as a percentage of GDP ........................................................................ 63 
Figure 25: Percentage of exchanges with the rest of the EU for industrial goods - year 2016 ..... 64 

3 

 
 
 
 
 
 
TERM OR ACRONYM 

MEANING OR DEFINITION 

Glossary 

CEP 

CCS 

CWE 

EEA 

EFTA 

EED II 

EPBD 

ETS 

EU 

EUA 

GDP 

GHG 

GVA 

JRC 

MSR 

NACE 

NGO 

PPAS 

RED II 

TFEU 

Clean Energy Package, 

Carbon Capture and Storage 

Central-Western Europe 

European Economic Area 

European Free Trade Association 

Energy Efficiency Directive 2018/2002/EU 

Energy Performance of Buildings Directive 2018/844/EU 

Greenhouse gas emission trading scheme 

European Union 

European Union Allowances 

Gross domestic product 

Greenhouse gas 

Gross value added 

Joint Research Centre 

Market Stability Reserve 

Statistical classification of economic activities in the European 
Community (NACE = Nomenclature statistiques des Activités 
économiques dans la Communauté Européenne) 

Non-governmental Organisations 

Power Purchase Agreements 

Renewable Energy Directive 2018/2001/EU 

Treaty on the functioning of the European Union 

4 

 
1. 

INTRODUCTION 

1.1.  Context and purpose of the evaluation 

1.1.1.  The EU ETS 

The European Union is at the forefront of the fight against climate change. It has set ambitious 
energy and climate policies over the last decades. 

In  2005,  the  European  Union  Greenhouse  Gas  Emission  Trading  Scheme  (EU  ETS)  was 
introduced  to  reduce  greenhouse  gas  (“GHG”)  emissions  in  a  cost-effective  way  and  combat 
climate change. It was the first international system for trading GHG emission allowances and it 
is covering more than 11 000 power stations and industrial plants in 31 countries (28 EU Member 
States and 3 EEA/EFTA States), as well as airlines. It covers around 45% of the EU’s emissions.  

The EU ETS is a “cap and trade” system: a cap is set on the total amount of greenhouse gas that 
can be emitted by factories, power plants and other installations in the system. The cap is reduced 
annually over time so that total emissions fall: in 2020, emissions from sectors covered by the EU 
ETS will be 21% lower than in 2005, and by 2030 43% lower. 

Within  the  cap,  companies  receive  or  buy  emission  allowances  which  they  can  trade  with  one 
another as needed. After each year a company must surrender enough allowances to cover all its 
emissions, otherwise fines are imposed.  

Directive  2009/29/EC1  amending  Directive  2003/87/EC2  (“ETS  Directive”)  improved  and 
extended the EU ETS in the third trading period 2013-2020 (“Phase 3”). Phase 3 of the EU ETS 
is  based  on  a  stricter  and  single  EU-wide  cap.  The  allocation  of  allowances  are  made  on  a 
transitional  fully  harmonised  EU-wide  basis  and  wider  auctioning  of  allowances  have  been 
progressively introduced. Participation in the EU ETS is mandatory  for companies operating in 
the sectors covered. The EU ETS thus creates a carbon price signal for businesses to reduce GHG 
emissions that contribute to climate change.  

There are two ways the carbon price affects companies covered by the EU ETS. On the one hand, 
these  companies  have  to  buy  CO2  certificates  corresponding  to  their  own  industrial  emissions 
(so-called  direct  ETS  costs).  Companies  also  pay  more  for  the  electricity  which  they  consume 
(so-called indirect ETS costs). Indirect ETS costs stem from the fact that the electricity producers 
pass the carbon price to consumers via the electricity price.  

The ETS Directive provides for the protection of EU sectors and sub-sectors “at significant risk 
of  carbon  leakage”  due  to  CO2  costs  resulting  from  the  EU  ETS.  Carbon  leakage  refers  to  a 
situation where a unilateral climate regulation in a certain jurisdiction (e.g. the EU ETS) leads to 
a transfer of production to other jurisdictions that have less stringent climate regulations on GHG. 
It  may  result  in  undesirable  environmental  and  economic  consequences,  namely  a  shift  of 
production  towards  other  regions  outside  the  EU  or  reduction  of  the  European  market  share 
globally.  Carbon  leakage  would  eventually  lead  to  an  increase  in  global  GHG  emissions  as  a 
result of increased emissions outside the EU exceeding reduced emissions inside the EU.  

To  address  international  competitiveness  concerns  of  industrial  sectors  that  are  deemed  to  be 
exposed  to  carbon  leakage,  the  ETS  Directive  set  the  possibility  for  certain  sectors  to  receive 

1   Directive  2009/29/EC  of  the  European  Parliament  and  of  the  Council  of  23  April  2009  amending  Directive 
2003/87/EC  so  as  to  improve  and  extend  the  greenhouse  gas  emission  allowance  trading  scheme  of  the 
Community, OJ L 140, 5.6.2009, p.63. 

2   Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme 
for  greenhouse  gas  emission  allowance  trading  within  the  Community  and  amending  Council  Directive  96 
/61/EC, OJ L 275, 25.10.2003, p. 32. 

5 

 
 
                                                           
allowances for free. The list of sectors eligible for receiving free allowances is laid down in the 
Carbon Leakage List. 

Article 10a(6) of the ETS Directive also set that Member States may adopt financial measures in 
favour of sectors exposed to carbon leakage risk due to indirect ETS costs passed on in electricity 
prices, provided that such measures comply with State aid rules. 

1.1.2.  The 2012 ETS Guidelines (2013-2020) 

Title VII, Chapter I of the Treaty on the Functioning of the European Union (“TFEU”) set the 
common rules on competition. In particular, Article 107§1 of the TFEU set a general prohibition 
principle of State aid. The next paragraphs of Article 107 of the TFEU then establish under which 
conditions  State  aid  measures  can  be  declared  compatible  with  the  internal  market3.  To  ensure 
that  this  prohibition  principle  is  respected  and  that  exemptions  to  such  principle  are  applied 
equally  across  the  EU,  Article  108§1  of  the  TFEU  requests  the  Commission  to  keep  under 
constant review existing aid  measures. Under Article 108§2 of the TFEU, the Commission has 
exclusive competence to assess the compatibility of an aid measure with the internal market. The 
Commission has discretion to choose whether it adopts for this purpose Guidelines or whether it 
approves the State aid granted by Member States on the basis of individual decisions on a case-
by-case  basis.  Where  the  Commission  adopts  Guidelines,  it  is  bound  in  accordance  with  the 
principle of equal treatment, to apply them to the cases described in the Guidelines alike. 4 

The  Commission  has  adopted  various  State  aid  guidelines  to  explicit  common  principles  for 
assessing  the  compatibility  of  aid  with  the  internal  market.  These  State  aid  guidelines  are 
regularly  reviewed  over  time  to  improve  their  efficiency  and  to  respond  to  the  European 
Council’s calls for less but better targeted State aid to boost the European economy.  

Based on the provision of Article 10a(6) of the ETS Directive, the Commission adopted in 2012 
the  Guidelines  on  certain  State  aid  measures  in  the  context  of  the  greenhouse  gas  emission 
allowance trading scheme post-2012 ("2012 ETS Guidelines"). The 2012 ETS Guidelines allow 
Member States to compensate some electro-intensive undertakings active in a sector exposed to 
international trade, for part of the higher electricity costs expected to result from the EU ETS in 
the period 2013-2020. 

The  Guidelines  provide that  Member  States  can  grant  aid only  in  certain  sectors  deemed  to  be 
exposed  to  carbon  leakage  risk  due  to  indirect  ETS  costs  (the  list  of  eligible  sectors  is  set  in 
Annex I of the 2012 ETS Guidelines). They also provide that such aid must be limited in size (the 
maximum aid amount is calculated through a formula, which takes into account the aid intensity, 
the CO2 emission factor of the country/region; the EUA forward price, the applicable product-
specific  electricity  consumption  efficiency  benchmark  and  the  baseline  output)  and  declining 
over  time.  In  particular,  the  aid  intensity  is  degressive,  as  the  2012  ETS  Guidelines  allow 
subsidies  of  up  to  85%  of  the  increase  due  to  indirect  ETS  costs  faced  by  the  most  efficient 
companies in each sector from 2013 to 2015. The aid intensity gradually falls to 75% in 2019-
2020. 

Article  56  of  the  2012  ETS  Guidelines  set  that  “the  Guidelines  will  be  applicable  until  31 
December 2020. After consulting the Member States, the Commission may amend them before 
that date on the basis of important competition policy or environmental policy considerations or 
in order to take account of other Union policies or international commitments. Such amendments 
might  in  particular  be  necessary  in  the  light  of  future  international  agreements  in  the  area  of 
climate change and future climate change’s legislation in the Union. […]”. 

3   Articles 42, 93, 106§2, 108§2 and 108§4 of the TFEU also provide for conditions under which State aid is or may 

be considered compatible with the internal market. 

4   Court Case C-310/99 Italy v Commission [2002] ECR I-2289, [52]. 

6 

 
                                                           
1.1.3.  The revised ETS Directive (2021-2030) 

The ETS Directive has been revised for its next trading period 2021-2030 (“Phase 4”), with the 
adoption of Directive (EU) 2018/4105, to enable it to achieve the EU's 2030 emission reduction 
targets.  The  new  ETS  Directive  states  in  its  recitals  that  "[i]t  would  be  desirable  that  Member 
States partially compensate, in accordance with State aid rules, certain installations in sectors or 
subsectors  which  have  been  determined  to  be  exposed  to  a  significant  risk  of  carbon  leakage 
because of costs related to greenhouse gas emissions passed on in electricity prices [...]."6 

Under the revised Directive, Article 10a(6) now set that "Member States should adopt financial 
measures […] in favour of sectors or subsectors which are exposed to a genuine risk of carbon 
leakage due to significant indirect emissions costs that are actually incurred from greenhouse gas 
emission  costs  passed  on  in  electricity  prices,  provided  that  such  financial  measures  are  in 
accordance with State aid rules, and in particular do not cause undue distortions of competition in 
the internal market. Where the amount available for such financial measures exceeds 25% of the 
revenues generated from the auctioning of allowances, the Member State concerned shall set out 
the reasons for exceeding that amount. Member States shall also seek to use no more than 25% of 
the revenues generated from the auctioning of allowances for the financial measures referred to in 
the  first  subparagraph.  [...]  Those  measures  shall  be  such  as  to  ensure  that  there  is  adequate 
protection  against  the  risk  of  carbon  leakage,  based  on  ex  ante  benchmarks  for  the  indirect 
emissions  of  CO2  per  unit  of  production.  Those  ex  ante  benchmarks  shall  be  calculated  for  a 
given  sector  or  subsector  as  the  product  of  the  electricity  consumption  per  unit  of  production 
corresponding  to  the  most  efficient  available  technologies  and  of  the  CO2  emissions  of  the 
relevant European electricity production mix". 

The  abovementioned  provisions  of  the  ETS  Directive  are  based  on  the  premise  that  financial 
support  for  indirect  emissions  costs  can  be  highly  distortive,  if  it  is  not  properly  targeted  to 
sectors  that  are  at  significant  risk  of  carbon  leakage  due  to  CO2  costs  passed  on  in  electricity 
prices and limited to the additional cost stemming from the EU ETS for the most energy efficient 
firms. Otherwise, aid would introduce economic distortions within the EU economy and have a 
detrimental impact on the efficiency of the EU ETS. 

1.1.4.  Clean Energy Package 

To implement the Energy Union Strategy, the “Clean Energy for All Europeans” package (also 
known as “Clean Energy Package, CEP”) was adopted in 2019 as a package consisting of eight 
legislative acts. All have been formally adopted and are in force, but Directives still need to be 
implemented by the EU Member States. 

-  Electricity  Market  Directive  2019/944/EU  and  Electricity  Market  Regulation 

2019/943/EU ACER Regulation 2019/942/EU; 

-  Regulation on Risk-Preparedness in the Electricity Sector Regulation 2019/941/EU and 

Repealing the Security of Supply Directive;  

-  Renewable Energy Directive 2018/2001/EU (RED II);  
-  Energy Efficiency Directive 2018/2002/EU (EED II);  
-  Energy Performance of Buildings Directive 2018/844/EU (EPBD); and 
-  Regulation 2018/1999/EU on the Governance of the Energy Union.  

Under the Energy Union Strategy and the CEP, the EU has EU-wide targets for 2030 to cut CO2 
emissions  by  at least  40% from  1990 levels, increase  the  share of renewable  energy  to  at least 

5  

6  

Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 
2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015 
/1814, OJ L 76, 19.3.2018, p. 3-27. 
Recital 13 of Directive 2018/410. 

7 

 
 
                                                           
32%  and  foster  energy  efficiency  (EE)  by  at  least  32.5%  (compared  to  2007  business-as-usual 
projection for 2030), while increasing the interconnectivity to 15% and reducing emissions from 
cars, vans and trucks.  

1.1.5.  The Green Deal Communication 

On  11  December  2019, the  Commission  published the  European  Green  Deal Communication7, 
outlining the policies to achieve climate-neutrality in Europe by 2050. To deliver the European 
Green  Deal,  there  is  a  need  to  rethink  policies  for  clean  energy  supply  across  the  economy, 
industry, production and consumption, large-scale infrastructure, transport, food and agriculture, 
construction,  taxation  and  social  benefits.  While  all  of  these  areas  for  action  are  strongly 
interlinked  and  mutually  reinforcing,  careful  attention  will  have  to  be  paid  when  there  are 
potential trade-offs between economic, environmental and social objectives. The Commission has 
already  set  out  a  clear  vision  of  how  to  achieve  climate  neutrality  by  20508.  The  Commission 
Proposal for a European Climate Law9 has also enshrined the 2050 climate neutrality objective in 
legislation.  

1.1.6.  The New Industrial Strategy for Europe 

On  10  March  2020,  the  Commission  published  the  New  Industrial  Strategy  for  Europe 
Communication10. The Communication stresses that the European Green Deal is Europe’s new 
growth strategy and that industry has a leading role to play in what is the greatest challenge and 
opportunity  of  our  times.  All  industrial  value  chains,  including  energy-intensive  sectors,  will 
have a key role to play. They will all have to work on reducing their own carbon footprints but 
also  accelerate  the  transition  by  providing  affordable,  clean  technology  solutions  and  by 
developing  new  business  models.  Energy-intensive  industries  are  indispensable  to  Europe’s 
economy  and  are  relied  on  by  other  sectors.  Modernising  and  decarbonising  energy-intensive 
industries must therefore be a top priority. 

1.2. 

Scope of the evaluation 

In  this  context,  the  evaluation  of  the  2012  ETS  Guidelines  seeks  to  assess  whether  State  aid 
measures  implemented  by  Member  States  during  Phase  3  have  prevented  carbon  leakage  (thus 
resulting  in  a  higher  overall  level  of  environmental  protection).  It  also  assesses  whether  the 
positive effects of the aid outweigh its negative effects in terms of distortions of competition in 
the internal market, while preventing overcompensation and ensuring a level playing field, in a 
context where not all Member States have decided to implement such compensation schemes. 

The  evaluation  is  conducted  under  the  “back-to-back”  procedure  established  by  the  Better 
Regulation  rules,  meaning  that  the  evaluation  and  the  impact  assessment  are  carried  out  in 
parallel as a single process. This procedure allows meeting the deadline of the start of the next 
ETS  period  on  1  January  2021  for  the  adoption  of  the  revised  ETS  Guidelines.  Under  this 
procedure, the evaluation is annexed to the Impact Assessment report. 

7   Communication  from  the  Commission  to  the  European  Parliament,  the  European  Council,  the  Council,  the 
European  Economic  and  Social  Committee  and  the  Committee  of  the  Regions,  The  European  Green  Deal, 
COM(2019) 640 final. 

8   A Clean Planet for all - A European strategic long-term vision for a prosperous, modern, competitive and climate 

9  

neutral economy COM (2018) 773. 
Proposal for a Regulation of the European Parliament and of the Council establishing the framework for achieving 
climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law), COM(2020) 80 final. 

10   Communication  from  the  Commission  to  the  European  Parliament,  the  European  Council,  the  Council,  the 
European  Economic  and  Social  Committee  and  the  Committee  of  the  Regions,  A  New  Industrial  Strategy  for 
Europe, COM(2020) 102 final. 

8 

 
 
                                                           
The Commission has already performed a comprehensive evaluation11 in 2015 for the revision of 
the  ETS  Directive,  which also covered the  impact  of  indirect  ETS costs  on  the  carbon  leakage 
risk.  The  evaluation  therefore  builds  on  the  results  of  the  2015  evaluation  underpinning  the 
proposal for a revised ETS Directive. This time, the evaluation only covers ETS aspects related 
to the implementation of the 2012 ETS Guidelines. 

In  terms  of  geographical  scope,  this  evaluation  covers  all  EU  Member  States  and  EEA  States 
even  if  only  12  Member  States  and  EEA  States  have  decided  to  implement  ETS  indirect  costs 
compensation schemes12. One of the aspects of the evaluation is to examine why some Member 
States  have  decided  to  implement  such  compensation  schemes  and  why  some  others  have 
decided not to implement such schemes. 

In terms of temporal scope, the evaluation covers the period from the entry into force of the ETS 
Guidelines in 2012. 

The evaluation assesses the aid to undertakings in sectors and subsectors deemed to be exposed 
to a significant risk of carbon leakage due to EU ETS allowances costs passed on in electricity 
prices (aid for indirect ETS costs). 

Other measures set by the 2012 ETS Guidelines are not covered by this evaluation: 

 

Investment  aid  to  highly  efficient  power  plants,  including  new  power  plants  that  are 
carbon capture and storage (CCS)-ready (cf. section 1.2 of the 2012 ETS Guidelines); 
  Aid involved in optional transitional free allowances for the modernisation of electricity 

generation (cf. section 1.3 of the 2012 ETS Guidelines); 

  Aid involved in the exclusion of small installations and hospitals from the EU ETS (cf. 

section 1.4 of the 2012 ETS Guidelines). 

In  Phase  3,  the  ETS  Directive  provided  for  the  possibility  to  grant  investment  aid  between  1 
January  2013  to  31  December  2016  (using  revenues  generated  from  the  auctioning  of 
allowances)  to  support  the  construction  of  highly  efficient  power  plants,  including  new  power 
plants that are ready for the environmentally safe capture and geological storage of CO2 ("CCS-
ready"). The 2012 ETS Guidelines therefore set the compatibility conditions for such investment 
aid. 

The ETS Directive also allowed excluding certain small installations and hospitals from the EU 
ETS  if  the  GHG  reductions  could  be  achieved  outside  the  framework  of  the  EU  ETS  at  lower 
administrative  cost.  As  the  exclusion  of  certain  small  installations  and  hospitals  may  involve 
State  aid,  the  ETS  Guidelines  currently  set  some  rules  for  the  State  aid  compatibility  of  such 
measures.  

None of these two measures have ever been notified by Member States to the Commission (no 
decision adopted), it would therefore be difficult for the Commission to evaluate them.  

Regarding the aid for the modernisation of electricity  generation, the ETS Directive allows the 
granting  of  free  allowances  to  electricity  generators  in  exchange  of  investments  undertaken  by 
the beneficiaries in upgrading their infrastructure, in clean technologies and in diversifying their 
energy  mix  (Article  10c  of  the  ETS  Directive).  This  derogation  to  the  principle  that  no  free 
allocation  shall  be  made  in  respect  of  any  electricity  production  (Article  10a(1)  of  the  ETS 
Directive)  will  remain  during  Phase  4  of  the  EU  ETS  but  the  conditions  to  implement  such 
derogation will change.  

The compatibility rules provided in the 2012 ETS Guidelines for such measure currently mirror 
the  rules  included  in  the  ETS  Directive  for  Phase  3  of  the  EU  ETS.  In  particular,  one  of  the 
conditions  for  the  aid  to  be  considered  compatible  is  compliance  with  the  ETS  Directive,  the 
Commission Decision on guidance on the methodology to transitionally allocate free allowances 

11   https://ec.europa.eu/clima/sites/clima/files/ets/revision/docs/review_of_eu_ets_en.pdf  
12   See Table 1 in section 3 below. 

9 

 
                                                           
to installations for electricity production pursuant to Article 10c(3) of the ETS Directive13 and the 
Commission Communication on the optional application of Article 10c of the ETS Directive14.  

The transitional free allocation for the modernisation of the power sector under Article 10c of the 
ETS  Directive  was  subject  to  the  evaluation  of  the  ETS  Directive15,  which  concluded  that  no 
distortion  of  competition  as  consequence  of  Article  10c  could  be  found.  The  policy  options 
concerning Article 10c of the ETS Directive have also undergone a full impact assessment16.  

For this reason, a new evaluation of the transitional free allocation for the modernisation of the 
power sector would duplicate the one already performed for the ETS Directive.  

Under  the  Better  Regulation  principles,  all  evaluations  should  assess  the  evaluation  criteria  of 
effectiveness, efficiency, coherence, relevance and EU added value of the intervention: 

  Effectiveness:  how  successful  has  the  EU  action  been  in  achieving  its  objectives?  To 

what extent do the observed effects link to the intervention? 

  Efficiency: to what extent are the costs associated with the intervention proportionate to 

the benefits it has generated? 

  Relevance: how well do the (original) objectives of the intervention (still) correspond to 

the needs within the EU? 

  Coherence:  to  what  extent  is  the  intervention  coherent  with  other  interventions  which 

have similar objectives? To what extent is the intervention coherent internally? 

  EU-added value: what is the additional value resulting from the intervention, compared 
to  what  could  reasonably  have  been  expected  from  Member  States  acting  at  national 
and/or  regional  levels?  What  would  be  the  most  likely  consequences  of  stopping  or 
withdrawing the existing EU intervention? 

All these evaluation criteria are assessed under the present evaluation.  

2.  BACKGROUND TO THE INTERVENTION 

2.1.  Description of the intervention and its objectives 

At the time of the adoption of the 2012 ETS Guidelines, the core EU policy context consisted in 
the  EU’s  Climate  and  Energy  Package  adopted  by  the  European  Council  in  March  2007.  The 
ETS Directive, as revised in 2009, was a central component of that policy which laid down two 
binding  targets  to  be  achieved  by  2020:  first,  a  reduction  of  CO2  emissions  by  20%  from  the 
emissions level in 1990 and, second, increasing the share of renewable energy sources in the EU 
to  20%  of  overall  energy  consumption  (over  the  same  time  span).  At  the  time,  the  European 
Council established a (non-binding) target to increase energy efficiency by 20% in 2020. 

2.1.1.  General objective 

The  general  objective  for  the  Commission  was  to  adopt,  under  the  State  aid  provisions  of  the 
TFEU  (Article  107(3)(c)),  Guidelines  for  the  assessment  of  State  aid  for  the  compensation  of 
indirect ETS costs arising in the context of Phase 3 of the EU ETS. 

13   Commission  Communication  of  29  March  2011  on  guidance  on the  methodology  to  transitionally  allocate  free 
allowances to installations for electricity production pursuant to Article 10c(3) of Directive 2003/87/EC, C(2011) 
1983 final, 29.3.2011. 

14   Communication from the Commission, Guidance document on the optional application of Article 10c of Directive 

2003/87/EC (OJ C 99, 31.3.2011, p.9). 

15   https://ec.europa.eu/clima/sites/clima/files/ets/revision/docs/review_of_eu_ets_en.pdf  
16   https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015SC0135&rid=6  

10 

 
                                                           
2.1.2.  Specific objectives 

The  ETS  Guidelines  aim  at  establishing  the  conditions  under  which  Member  States  can 
implement the possibility set in Article 10(a)6) of the ETS Directive to adopt financial measures 
benefiting sectors exposed to carbon leakage risk in compliance with EU State aid rules. 

The  need  is  to  avoid  carbon  leakage  that  would  impair  the  objective  of  the  EU  ETS  to  reduce 
GHG  emissions  by  increasing  CO2  emissions  outside  the  ETS  area  due  to  lower  production, 
lower investment and relocation of EU firms as a result of higher costs imposed by the EU ETS. 

As set in recital 5 of ETS Guidelines: "in line with the balancing test formulated in the 2005 State 
aid action plan17, the primary objective of State aid control in the context of the implementation 
of the EU ETS is to ensure that State aid measures will result in a higher reduction of greenhouse 
gas emissions than would occur without the aid and to ensure that the positive effects of the aid 
outweigh its negative effects in terms of distortions of competition in the internal market." 

Recital 8 of the ETS Guidelines further states that "addressing the risk of carbon leakage serves 
an  environmental  objective,  since  the  aid  aims  to  avoid  an  increase  in  global  greenhouse  gas 
emissions due to shifts of production outside the Union, in the absence of a binding international 
agreement on reduction of greenhouse gas emissions. At the same time, aid for indirect emission 
costs  may  have  a  negative  impact  on  the  efficiency  of  the  EU  ETS.  If  poorly  targeted, the  aid 
would  relieve  the  beneficiaries  of  the  cost  of  their  indirect  emissions  thereby  limiting  the 
incentives for emission reductions and innovation in the sector. As a result, the costs of reducing 
emissions  would  have  to  be  borne  mainly  by  other  sectors  of  the  economy.  Furthermore,  such 
State aid may result in significant distortions of competition in the internal market, in particular 
whenever undertakings in the same sector are treated differently in different Member States due 
to  different  budgetary  constraints.  Therefore,  these  Guidelines  need  to  address  three  specific 
objectives:  minimising  the  risk  of  carbon leakage,  preserving  the  EU  ETS  objective to  achieve 
cost-efficient decarbonisation and minimising competition distortions in the internal market.” 

Competition distortions can be twofold:  

 

 

Intra-sector distortions would arise if only one or some Member States decide to support 
installations within eligible sectors.  
Inter-sector  distortions  could  arise  in  situations  where  there  is  substitutability  between 
materials and products manufactured by different sectors, one or some being eligible for 
compensation under the ETS Guidelines.  

The  ETS  Guidelines  are  not  self-executing.  Member  States  are  enabled  but  are  not  obliged  to 
address carbon leakage risk due to indirect ETS costs in their respective jurisdictions. The ETS 
Guidelines  set  the  conditions  under  which  Member  States  can  implement  indirect  ETS  costs 
compensation schemes – should they choose to do so – in compliance with EU State aid rules: 

  List  of  eligible  sectors:  Member  States  can  grant  compensation  for  indirect  ETS  costs 
only to certain sectors that are deemed to be exposed to a risk of carbon leakage. These 
sectors are listed in Annex II of the ETS Guidelines. In line with Article 10a(15) of the 
ETS  Directive,  sectors  and  subsectors  listed  in  this  Annex  have  been  deemed  to  be 
exposed to a significant risk of carbon leakage due to indirect ETS costs on a quantitative 
basis if the intensity of trade with third countries is above 10% and the sum of indirect 
additional  costs  induced  by  the  implementation  of  the  ETS  Directive  would  lead  to  a 
substantial  increase  in  production  costs,  calculated  as  a  proportion  of  the  gross  value 
added (GVA), amounting to at least 5%. Similar with the provisions in Article 10a(17) of 
the ETS Directive, the assessment of sectors and subsectors on the basis of quantitative 
criteria  has  been supplemented  with  a  qualitative  assessment,  where  relevant  data  were 

17   State aid action plan – Less and better targeted State aid: a roadmap for State aid reform 2005 to 2009, COM(205) 

107 final, 7.6.2005. 

11 

 
                                                           
available and industry representatives or Member States have made sufficiently plausible 
and substantiated claims in favour of eligibility. The qualitative assessment was applied, 
firstly, to borderline sectors, i.e. NACE-418 sectors which have faced increased indirect 
emission  costs  in  the  range  of  3-5%  and a  trade  intensity  of  at  least  10%; secondly,  to 
sectors  and  subsectors  for  which  official  data  are  missing  or  are  of  poor  quality;  and 
thirdly,  to  sectors  and  subsectors  that  can  be  considered  to  have  been  insufficiently 
represented  by  the  quantitative  assessment.  Sectors  or  subsectors  with  less  than  1% 
indirect CO2 costs have not been considered.  

  Calculation  formula:  the  ETS  Guidelines  provides  the  calculation formula to  determine 
the  maximum  aid  amount  that  can  be  granted  by  Member  States  when  compensating 
undertakings  for  indirect  ETS  costs.  The  calculation  formula  takes  into  account  the 
installation’s  baseline  production  levels  or  the  installation’s  baseline  electricity 
consumption levels as defined in the Guidelines, as well as the CO2 emission factor for 
the electricity supplied by combustion plants in the geographic area where the installation 
is  located19.  The  formula  ensures  that  the  aid  is  proportionate  and  that  it  maintains  the 
incentives for electricity efficiency and the transition from “grey” to “green” electricity, 
in accordance with recital 27 of Directive 2009/29/EC20. 

  Application of the State aid balancing test: on 7 June 2005, the Commission adopted a 
State  aid  action  plan21  presenting  the  guiding  principles  for  a  comprehensive  reform  of 
State  aid  rules.  This  action  plan  set  that  “State  aid  should  only  be  used  when  it  is  an 
appropriate  instrument  for  meeting  a  well-defined  objective,  when  it  creates  the  right 
incentives, is proportionate and when it distorts competition to the least possible extent. 
For  that  reason,  appreciating  the  compatibility  of  State  aid  is  fundamentally  about 
balancing the negative effects of aid on competition with its positive effects in terms of 
common interest.” The ETS Guidelines ensure that these principles are respected when 
Member States decide to implement indirect ETS costs compensation schemes.  

2.1.3.  Intervention logic 

Figure 1 below illustrates the intervention logic of the 2012 ETS Guidelines. The Guidelines are 
the  main  Commission’s  tool  to  assess  the  compatibility  with  the  internal  market  of  Member 
States’  compensation  granted  to  address  the  risk  of  carbon  leakage  due  to  indirect  ETS  costs 
identified by the ETS Directive. The overall objective of the ETS Guidelines is to find a balance 
between  addressing  the  risk  of  carbon  leakage  due  to  indirect  ETS  costs  and  preserving  the 
incentive  for  a  cost-effective  decarbonisation  of  the  economy,  while  minimizing  competition 
distortions. 

The  expected  result  of  the  implementation  of  the  ETS  Guidelines  is  a  positive  influence  on 
relocation  decisions  in  sectors  eligible  for  indirect  ETS  costs  compensation  as  per  the  ETS 
Guidelines,  while  preserving  the  incentive  for  cost-effective  decarbonisation  for  these  sectors. 
Another  intended  result  is  the  minimisation  of  competition  distortions  through  homogeneous 
rules applying throughout the EU. As the EU has an exclusive competence on competition issues, 
it is able to define common State aid rules applicable to all Member States willing to implement 
an indirect ETS costs compensation scheme. 

Unintended  results  are  competition  distortions  if  the  ETS  Guidelines  do  not  adequately  target 
sectors exposed to a significant risk of carbon leakage. In addition, as not all Member States have 

18   The Statistical classification of economic activities in the EU (“NACE”) is a four-digit classification providing the 

framework for collecting and presenting statistical data according to economic activity. 

19   Annex  IV  of  the  2012  ETS  Guidelines  set  the  applicable  CO2  emission  factor  for  each  of  the  geographic  areas 

across the EU. 

20   Directive  2009/29/EC  of  the  European  Parliament  and  of  the  Council  of  23  April  2009  amending  Directive 
2003/87/EC  so  as  to  improve  and  extend  the  greenhouse  gas  emission  allowance  trading  scheme  of  the 
Community (OJ L 140, 5.6.2009, p. 63).  

21   State  aid  action  plan  –  Less  and  better  targeted  State  aid:  a  roadmap  for  State  aid  reform  2005  to  2009, 

COM(2005) 107 final, 7.6.2005. 

12 

 
                                                           
implemented  an  indirect  ETS  costs  compensation  scheme,  there  is  a  risk  of  competition 
distortions across the EU. Also, not all Member States have implemented compensation schemes 
as of the entry into force of the ETS Guidelines. To the contrary, the implementation of indirect 
ETS  compensation  schemes  is  progressive  throughout  the  EU  and  is  likely  to  continue  to 
progress over the next trading period (see Table 1 in Implementation / State of Play below). The 
intervention also creates administrative costs.  

ETS Guidelines had an unexpected impact on bilateral contracts between electro-intensive users 
and producers of electricity from renewable energy sources. Recital 11 of the ETS Guidelines set 
that  “In  case  of  electricity  supply  contract  that  do  not  include  CO2  costs,  no  State  aid  will  be 
granted”  which  can  be  interpreted  by  Member  States  as  an  exclusion  of  renewable  power 
purchase  agreements  (“PPAs”)  from  indirect  cost  compensation.  However,  it  has  been  pointed 
out  that  prices  of  renewable  electricity  are  linked  to  market  prices  and  therefore  include  CO2 
emission  costs,  therefore  excluding  them  from  compensation  makes  entering  into  a  renewable 
PPA less attractive than into fossil fuel based PPAs or buying power on the wholesale market, in 
which cases the consumer can receive compensation (see Effectivenessbelow).  

The ETS Guidelines’ impact takes place in a framework where other policies (within the EU or 
outside) can have an impact: 

  Complementary  policies,  in  and  outside  the  EU:  the  ETS  Directive  recognizes  that  the 
risk of carbon leakage would diminish if major trading partners would adopt equivalent 
climate policies with equivalent carbon costs on their domestic industries. The number of 
emissions trading systems around the world is increasing. Besides the EU ETS, national 
or  sub-national  systems  are  already  operating  or  under  development  in  Canada,  China, 
Japan,  New  Zealand,  South  Korea,  Switzerland  and  the  United  States.  Inside  the  EU, 
Member States are also free to implement more stringent energy policies. 

  Free  allowances  to  tackle  carbon  leakage  risk  incurred  by  direct  ETS  costs:  the  ETS 
Directive provides for the protection of EU sectors at significant risk of carbon leakage 
due to CO2 costs resulting from the EU ETS. Besides the compensation of indirect ETS 
costs for some sectors, the ETS Directive also establishes the granting of free allowances 
to certain sectors (listed in the Carbon Leakage List). 

  Other  support  measures  with  an  impact  on  the  electricity  bill:  Apart  from  the 
compensation  mechanism  set  by  the  ETS  Directive,  Member  States  have  other 
possibilities  to  influence  the  electricity  costs  for  electricity  consumers,  in  particular 
electro-intensive  undertakings.  This  can  take  various  forms.  Article  17  of  the  Energy 
Taxation Directive22 provides that Member States can apply reduced levels of taxation to 
electricity  when  used  by  energy-intensive  undertakings.  In  addition,  reduction  systems 
can  apply  to  the  electricity  network  tariffs,  the  levies  imposed  on  electricity  bills  to 
finance  renewable  electricity  (or  other  types  of  levies  imposed  on  electricity 
consumption). Finally, electro-intensive undertakings can participate into interruptibility 
schemes23.  

  Anti-dumping  measure: a non-EU  company  is  “dumping”  if it exports  a  product to the 
EU at a price lower than the normal value of the product. The Commission is responsible 
for  investigating  dumping  claims  and  imposing  measures.  Anti-dumping  measures 
(usually  an  “ad  valorem”  duty)  can  be  put  on  imports  of  specific  products  if  the 
Commission’s anti-dumping investigation justifies it. Such measures also have an effect 
on international competitiveness of EU undertakings and may have an influence on the 
risk of carbon leakage. 

22   Council  Directive  2003/96/EC  of  27  October  2003  restructuring  the  Community  framework  for  the  taxation  of 

energy products and electricity (OJ L 283, 31.10.2003, p. 51). 

23   Under interruptibility schemes, large electricity consumers are remunerated for their ability to quickly reduce their 
electricity consumption upon request from the transmission system operator during critical periods for the power 
network. 

13 

 
                                                           
Figure 1: Overall intervention logic 

2.2.  Baseline and points of comparison  

Directive  2009/29/EC  introduced  for  the  first  time  in  the  EU  ETS  the  possibility  for  Member 
States to provide State aid to compensate for higher electricity costs due to the EU ETS. Phase 3 
of the EU ETS that started on 1 January 2013 was therefore the first trading period in which such 
State aid measure was introduced. 

Phase 1 (2005-2007) and Phase 2 (2008-2012) of the EU ETS had stable caps over time on the 
total amount of GHG emissions that could be emitted by installations covered by the EU ETS. 
Phase 3 of the EU ETS is more stringent as the cap on emissions falls by 1.74% each year (see 
Figure  2  below).  As  a  result,  GHG  emissions  from  sectors  covered  by  the  EU  ETS  will  be  in 
2020, 21% lower than in 2005. 

Figure 2: EU ETS CO2 Emissions and annual cap vs. EUA prices 

14 

 
 
 
Notes: 

Source: 

Graph shows verified CO2 emissions from stationary sources. 
LRF=Linear Reduction Factor (annual rate of decline in CO2 cap, 2021-2030). 
European commission, S&P Global Platts 

As  a  consequence  of  such  reduction  of  the  ETS  cap,  the  CO2  price  was  expected  to  increase 
during  Phase  3.  The  CO2  price  has  been  volatile  since  the  launch  of  the  EU  ETS  in  2005  as 
shown in the Figure 3 below. 

Figure 3: EUA closing prices 

Source: 

Sandbag 

Before the implementation of Directive 2009/29/EC and of the ETS Guidelines, no Member State 
had  been  granting  aid  to  reduce  carbon  leakage  risk  due  to  indirect  ETS  costs.  The  baseline 
scenario  was  therefore  a  situation  where  no  State  aid  was  granted  for  the  compensation  of 
indirect ETS costs. 

3. 

IMPLEMENTATION / STATE OF PLAY 

3.1.  Description of the current situation  

12  Member  States  have  introduced  schemes  to  compensate  for  indirect  ETS  costs.  In  addition, 
Norway  has  also  implemented  such  compensation  scheme.  Pursuant  to  Article  108§3  of  the 
TFEU,  prior  to  the  implementation  of  the  scheme,  Member  States  have  to  notify  it  to  the 
Commission  under  EU  State  aid  rules.  Once  the  Commission  has  adopted  a  no  objection 
decision, the ETS compensation scheme can enter into force in the Member State concerned.  

The map below shows Member States having introduced an ETS compensation scheme: 

15 

 
 
 
Figure 4: Indirect ETS costs compensation schemes 

Created with mapchart.net © 

Member States are free to design their national ETS compensation scheme as long as they fulfil 
all the conditions set out in the 2012 ETS Guidelines. In particular, Member States can choose 
the financing of their compensation scheme. It can, for example, be financed through the national 
budget  (or  regional  budget,  as  in  Wallonia)  or  through  the  auctioning  of  emission  allowances 
(e.g. in Flanders and Greece). In case the revenues from the auctioning of emission allowances do 
not  cover  the  total  amount  required  for  compensation  of  indirect  ETS  costs,  the  aid  amount  is 
reduced or adjusted proportionately for all eligible undertakings.  

One  Member  State  (Spain)  has  adjusted  the  budget  of  its  indirect  ETS  costs  compensation 
scheme  during  the  implementation  period.  Such  amendment  of  the  budget  is  subject  to  a  prior 
notification  to  the  Commission  under  State  aid  rules24.  Another  Member  State  (France)  has 
submitted a notification to the Commission to amend its ETS compensation scheme so that the 
aid received under such scheme can be cumulated with other types of aid as per point 47 of the 
2012 ETS Guidelines.  

Only  the  Netherlands  performed  an  evaluation  of  the  scheme  at  national  level  in  2017.  The 
conclusion of that evaluation was overall positive, as the scheme was assessed as effective and 
efficient. 

Six Member States (Germany, the Netherlands, Belgium (Flanders), Slovakia, Finland, Poland) 
and  Norway  have  introduced  a  consumption  threshold  to  limit  the  administrative  burden  of 
processing applications under the schemes. The aim of the threshold is to avoid a situation where 
administrative  costs  both  for  potential  beneficiaries  and  the  State  are  disproportionally  high 
compared  with  the  aid  amount.  The  threshold  was  set  in  an  objective  way,  on  the  basis  of  the 
calculation  of  the  hypothetical  aid  amount  corresponding  to  that  level  of  electricity 

24   Article 4(2) of the Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation 
(EC) 2015/1589 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of 
the  European  Union  set  that  “the  following  alterations  to  existing  aid  shall  be  notified  […]:  increases  in  the 
budget of an authorised aid scheme exceeding 20% […]”. 

16 

 
 
 
                                                           
consumption.25  That  hypothetical  aid  amount  has  been  estimated  between  EUR  8,333  per 
beneficiary (PL), EUR 4,200 (DE, SK), EUR 4,000 (NL and BE Flanders), and EUR 2,520 per 
year  in  FI26.  This  amount  is  different  for  each  Member  State  for  the  following  reasons:  (i)  the 
decisions  are  adopted  in  different  years  and  the  forward  price  used  for  the  calculation  varies 
between the years; (ii) the CO2 factors are different (see Annex of the 2012 ETS Guidelines); and 
(iii) Finland applies a lower aid intensity, as compared to the permissible one under the 2012 ETS 
Guidelines. 

The  Table  below  presents  the  list  of  Member  States  (and  Norway)  having  introduced  an  ETS 
compensation scheme: 

Table 1: List of Member States (and Norway) having introduced and ETS compensation scheme 

Member State 

Duration of the 
scheme 

Budget of the scheme 

Commission decision 

United Kingdom 

2013 – 2020 

Germany 

2013 – 2020 

The Netherlands 

2013 – 2020 

Belgium (Flanders) 

2013 – 2020 

Spain 

2013 – 2020 

Greece 

2013 – 2020 

Lithuania 

2014 – 2020 

Slovakia 

2014 – 2020 

France 

2015 – 2020 

Finland 

2016 – 2020 

Belgium (Wallonia) 

2017 – 2020 

Luxembourg 

2017 – 2020 

Poland27 

Romania29 
 EEA State 

2019-2020 

2019-2020 

£ 113 million (2013-
2015) 
€ 576 million (2013-
2015) 
€ 156 million (2014-
2015) 
€ 7-113 million (annual 
budget based on CO2 
price) 
€ 695 million (2013-
2020) 
€ 14-20 million (annual 
budget based on CO2 
price) 
€ 13,1 million (2014-
2020) 
€ 250 million (2014-
2020) 
€ 364 million (2015-
2018) 
€ 149 million (2016-
2020) 
€ 17,5 million (2017-
2020) 
€ 48-60 million (2017-
2020) 
Approximately € 417,5 
million28 (2019-2020) 
€291 million (2019-2020) 

SA.35543  

SA.36103 

SA.37084 

SA.37017 

SA.36650 / SA.45164 / 
SA.49751 / SA.53427 
SA.38630 

SA.41981 

SA.43506 

SA.43389 / SA.49875 

SA.44378 

SA.49630 

SA.51097 

SA.53850 

SA.56403 
EFTA Surveillance 

25   This calculation is based on the formula in point 27(b) of the ETS Guidelines. 
26  

In the Finnish scheme, the beneficiary must pay an administrative fee between 600 and 1,900 EUR. 

27   The  Polish  indirect  ETS  costs  compensation  scheme  is  not  taken  into  account  in  the  analysis  conducted  in  this 

evaluation as it entered into force afterward. 

28   PLN 1 780 million. 
29   The Romanian indirect ETS costs compensation scheme is not taken into account in the analysis conducted in this 

evaluation as it entered into force afterward. 

17 

 
 
 
 
                                                           
Norway 

2013-2020 

Approximately € 286,5 
million30 (2013-2020) 

Authority decision 

355/13/COL 

Ex  post  monitoring  of  State  aid  schemes  is  required  under  Article  108(1)  TFEU,  according  to 
which “the Commission shall, in cooperation with Member States, keep under constant review all 
systems  of  aid  existing  in  those  States”.  The  Procedural  Regulation31  provides  a  more  specific 
legal basis as it obliges Member States to keep and provide the necessary documentation to the 
Commission  for  monitoring  purposes.  These  provisions  on  monitoring  are  also  included  in  the 
2012 ETS Guidelines under point 54. In addition, point 50 of the 2012 ETS Guidelines states that 
“the  Commission  will  regularly  monitor  aid  granted  to  undertakings  in  sectors  and  subsectors 
deemed  to  be  exposed  to  a  significant  risk  of  carbon  leakage  due  to  EU  ETS  allowance  costs 
passed on in electricity prices […]”.  

Since  the  adoption  of  the  2012  ETS  Guidelines,  two  ETS  compensation  schemes  have  been 
selected for ex post monitoring: the United Kingdom scheme in 2015 and the German scheme in 
2017.  

As  regard  the  ETS  compensation  scheme  in  force  in  the  United  Kingdom,  the  Commission 
concluded  that  the  implementation  of  the  scheme  met  all  the  compatibility  conditions.  Despite 
some  irregularities,  the  examination  of  the  sample  of  individual  aid  awards  and  the  additional 
information provided by the United Kingdom clarified that these irregularities did not materialise 
in the granting of incompatible aid.  

Further to the  verification of  the legal basis  of the  German  ETS  compensation scheme  and the 
examination of a sample of beneficiaries, the Commission concluded that the scheme met all the 
compatibility criteria.  

Based  on  information  submitted  by  Member  States  under  their  obligation  to  submit  annual 
reports,  it  appears  that  over  the  period  2013-2017,  Member  States  have  spent  EUR  2  118,024 
million  through  their  schemes  compensating  for  indirect  ETS  costs.  Table  2  below  present  the 
spending of all Member States having implemented an indirect ETS costs compensation schemes 
for each year. 

Table 2 and graph: Members States yearly spending on indirect ETS costs compensation 

Year 

2013 

2014 

2015 

2016 

2017 

Total 

Spending (EUR million) 

42,44 

408,25 

270,34 

517,38 

879,61 

2 118,024 

30   NOK 2 840 million. 
31   Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 

of the Treaty on the Functioning of the European Union; OJ L 248, 24.9.2015, p.9. 

18 

 
 
                                                           
Annual spending for indirect ETS costs compensation 

1000

900

800

700

600

500

400

300

200

100

0

2013

2014

2015

2016

2017

Source:  Member States annual reports  

4.  METHOD 

4.1. 

Short description of data collection and assessment methods  

The  evaluation  was  conducted  using  various  methods  and  informed  by  the  triangulation  of  a 
range of sources, including evidence and opinions gathered by external and internal studies, open 
and targeted consultation of stakeholders, information from annual reports submitted by Member 
States and ex post monitoring of indirect ETS costs compensation schemes. 

In particular, the Commission commissioned ADE and Compass Lexecon (“the Consortium”) to 
provide  support  in  the  combined  evaluation  and  impact  assessment  study  of  the  2012  ETS 
Guidelines.  The  Consortium  provided  support  to  the  Commission  through  the  three  following 
tasks: 

-  Analysis of decisions of Member States to compensate indirect ETS costs for certain 
sectors or subsectors. This analysis was performed in two steps. First, the Consortium 
tried  to  identify  the  reasons  that  might  explain  why  some  Member  States  have  or  not 
implemented compensation schemes during Phase 3 of the EU ETS. It gathered data in 
order  to  assess  if  the  choices  were  driven  by  structural  evidence.  To  do  so,  the 
Consortium analysed data such as electricity consumption, electricity prices for different 
industrial  sectors,  producer  prices,  manufacturing  levels,  energy  intensity  rates,  etc.  in 
each  Member  State.  This  data  were  downloaded  from  public  sources  such  as  Eurostat. 
Second,  the  Consortium  looked  at  the  reasons  behind  these  choices  such  as  policy 
decisions.  

-  Extensive  literature  review  on  the  carbon  leakage  due  to  indirect  ETS  costs.  The 
literature  review  built  on  the  one  conducted  for  the  2015  Evaluation  and  looked  at  the 
most recent information regarding the risk of carbon leakage due to indirect ETS costs 
that  might  have  been  avoided  by  the  indirect  cost  compensation.  In  addition,  this 
literature  review  gathered  information  regarding  the  impact  of  indirect  ETS  costs 
compensation  on  the  decarbonisation  objectives  and  the  creation  of  market  distortions. 
Any additional information regarding administrative costs or economic impacts of such a 
measure have also been gathered. The preliminary research showed that the publications 
focusing only on the carbon leakage due to indirect ETS costs are limited. Therefore, the 
Consortium  provided  an  overview  of  the  literature  on  carbon  leakage  risk  due  to  ETS 

19 

 
 
 
costs  as  a  whole  (including  both  direct  and  indirect  ETS  costs).  It  also  considered  the 
broader  literature  on  the  impact  of  electricity  costs  on  competitiveness  and  focused  on 
the answers from the public consultation to provide content to the Commission to answer 
the evaluation questions. 

-  Critical review of the public and targeted consultations responses. The answers from 
the public consultation launched in 2019 on the revision of the ETS Guidelines have been 
critically  reviewed  and  summarised.  Using  those  responses,  the  Consortium  provided 
information  related  to  the  assessment  of  the  Member  States’  intervention  based  on  the 
following  criteria:  effectiveness,  efficiency,  relevance,  coherence  and  EU  value  added. 
The Consortium also focused on the market distortions within the EU and on the effect of 
compensation  schemes  on  energy  efficiency  improvements  during  Phase  3  of  the  EU 
ETS.  

The findings of an extensive public consultation and targeted consultations further supported the 
evaluation (see Annex 2). In particular, the consultation activity was designed to allow interested 
parties to provide their feedback and experiences of the implementation of State aid rules related 
to  indirect  ETS  cost  compensation.  The  consultation  activities  therefore  covered  backward 
looking questions that address existing performance. A significant amount of contributions was 
registered  for  the  public  consultation,  providing  insights  into  the  views  of  stakeholders.  In 
addition, a targeted consultation sent to all Member States and EEA Members complemented the 
public consultation to ensure a robust evidence base. In that context, the Commission reminded 
Member  States  of  the  importance  of  reporting  data  on  the  implementation  of  the  schemes. 
Finally,  a targeted  consultation  of interested sectors  gathered information  for the  determination 
for  the  Fourth Trading  Period  of the  sectors  exposed to  carbon leakage  risk  due  to  the indirect 
emission costs they  face and  for the determination  of  the level  of  compensation  that should  be 
granted to sectors to reduce such risk of carbon leakage due to indirect emission costs. 

This evaluation is also supported by a Technical Report by the Joint Research Centre (the “JRC 
Technical Report”).32 The report evaluates in particular the effectiveness of the aid in the period 
2013-2017 and the potential competition distortions, using firm-level data.  

Finally, this evaluation also reflects the results of the evaluation performed by the Netherlands of 
their  national  scheme  in  2017,  and  the  results  of  the  ex  post  monitoring  of  the  UK  scheme  in 
2015 and the German scheme in 2017.  

4.2.  Limitations and robustness of findings 

One of the main limitations of the evaluation stems from the fact that many factors can influence 
relocation decisions and it is therefore very difficult to find evidence of the role of indirect ETS 
costs in such companies’ decisions. These exogenous factors, such as other production costs (e.g. 
energy  or  labour  costs),  geographical  distance  to  market  demand,  supply  and  demand  side 
changes along the value chain, etc. also have an impact on competitiveness of undertakings and 
therefore also play a role in relocation decisions. Such limitation was already highlighted in the 
2015 Evaluation33 and is still relevant for the present evaluation.  

Another  limitation  derives  from  the  fact  that  not  all  Member  States  provided  reports  on  the 
implementation of their schemes, and some of the reports submitted are also incomplete.  

32   A. Ferrara, A. and Giua, L., The Effects of EU ETS Indirect Cost Compensation on Firms Outcomes, European 

Commission, 2020, JRC119837. 

33   See  for  example  the  conclusion  of  chapter  3.4  on  free  allocation  and  carbon  leakage  which  states  that  “the 
evaluation first focussed on whether evidence can be found for actual carbon leakage. The difficulty in any such 
evaluation, however, lies in the need to establish a causality link between relocation of production and asymmetric 
climate policies. This difficulty remains unresolved based on current findings.” 

20 

 
 
 
                                                           
In addition, there is generally no distinction in academic literature between the impact of direct 
and indirect ETS costs on industry competitiveness, because fundamentally the potential loss of 
competitiveness is caused by uneven additional costs. It is also difficult to estimate indirect ETS 
costs as they depend essentially on estimates of the extent of cost-pass through in electricity. As a 
result, the aspect of carbon leakage caused by indirect ETS costs is generally studied in literature 
via an increase in input price, such as electricity or energy prices. 

The  circumstance  that  for  all  consultation  activities  a  large  share  of  the  replies  came  from 
industrial  stakeholders  (businesses  and  business  associations)  has  significantly  affected  their 
outcome. The nature of these replies reveals a consistent bias towards the argument that, with low 
carbon  prices  the  Guidelines,  effectively  protected  only  eligible  sectors,  but  failed  to  prevent 
carbon  leakage  in  non-eligible  sectors.  This  was  particularly  the  case  for  the  feedback  to  the 
Inception Impact Assessment, as 100% of the respondents were industrial stakeholders. To this 
extent, Member States, NGOs and universities provided alternative insights, albeit outnumbered 
by the former categories. In particular, a few Member States and some NGOs argued that eligible 
sectors  were  not  sufficiently  exposed  to  a  risk  of  carbon  leakage  to  justify  a  compensation  of 
indirect  ETS  costs  and  that  the  compensation  in  phase  III  has  been  too  generous.  For  these 
reasons,  the  Commission  often  could  not  take  into  account  the  results  of  the  consultation 
activities as reliable evidence to corroborate a finding, but rather used the opinions gathered to 
better describe the evaluation’s findings. 

It is also difficult to find studies analysing the recent  period of the EU ETS (Phase 3). Most of 
available  studies  refer  to  Phase  1  and  Phase  2  of  the  EU  ETS  where  no  indirect  costs 
compensation was yet in place. The number of empirical studies with extension to Phase 3 is very 
limited  and  no  published  study  so  far  has  explored  the  very  recent  period  with  relatively  high 
carbon price. 

The  JRC  Technical  Report  is  the  first  study  analysing  the  impact  of  the  ETS  indirect  cost 
compensation  at  firm  level  with  an  EU-wide  coverage.  Even  if  the  study  is  based  on  a  unique 
panel  dataset  at  firm  level,  containing  detailed  information  on  the  beneﬁciaries  of  the  ETS 
indirect  cost  compensation  gathered  from  DG  COMP  and  balance  sheet  ﬁnancial  variables  of 
ﬁrms extracted from the Orbis database, the study has some limitations. In the reports submitted 
by  Member  States  some  of  the  entries  are  transmitted  only  in  part,  or  are  not  reported  at  all, 
despite the fact that they are in the possession of the corresponding national managing authority. 
When  harmonising  records  provided  by  diﬀ erent Member  States,  if  any  of  the entries  was  not 
available even for one country or for a single year, then the entry cannot be used in the analysis. 
This issue greatly limited the possibility to exploit the available data in the analysis presented in 
the JRC Technical Report (see paragraph 6 of the JRC Technical Report). 

The  2015  Evaluation  also  highlights  that  the  notion  of  carbon  leakage  can  cover  different 
assumptions  (see  Preamble  of  chapter  3.4  of  the  2015  Evaluation:  “it  does  not  become 
immediately clear from public discussion and stakeholders comments what effects are subsumed 
under  the  term  carbon  leakage.  Is  it  to  be  understood  as  loss  of  market  share  of  an  EU  ETS 
installation to an extra-EU competitor, lower investments made in the EU, physical relocation of 
industrial  installations  to  outside  EU,  or  does  it  cover  more  than  one  or  even  all  of  those 
aspects?”).  Under  the  2012  ETS  Guidelines,  carbon  leakage  describes  “the  prospect  of  an 
increase in global GHG emissions when companies shift production outside the Union because 
they  cannot  pass  on  the  cost  increases  induced  by  the  EU  ETS  to  their  customers  without 
significant loss of market share”34. Some deviations might therefore arise between the scope of 
academic researches and the definition given by the 2012 ETS Guidelines. 

Finally,  the  fact  that  Member  States  implemented  compensation  measures  makes  it  difficult  to 
identify the risk of carbon leakage. Even if compensation of indirect ETS costs was implemented 
for the first time only during Phase 3 of the EU ETS, the granting of free allowances for direct 
ETS costs was already in place during the first two phases of the EU ETS. It is therefore difficult 

34   See recital 7 of the ETS Guidelines. 

21 

 
                                                           
to establish what would have been the impact of ETS costs without compensation measures of 
any type of ETS costs. 

All these limitations have an impact on the analysis of both the current situation and the baseline 
scenario. 

5.  ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONS 

5.1.  OVERVIEW OF THE EVALUATION QUESTIONS 

Relevance 

  To what extent are the ETS Guidelines still relevant? 

o  To what extent does the original objective of the Guidelines to minimise the risk 
of  carbon  leakage  while  preserving  the  incentive  for  a  cost  effective 
decarbonisation  of  the  economy  without  creating  undue  competition  distortion 
still correspond to the needs of the EU? 

Effectiveness 

  To what extent did the ETS Guidelines successfully achieve the three objectives pursued? 

o  To what extent did the ETS Guidelines adequately  minimise the risk of carbon 

leakage at the minimum cost? 

o  To what extent did the ETS Guidelines prevent undue competition distortions? 
o  To what extent did the ETS Guidelines preserve the incentive for cost effective 

decarbonisation of the economy? 

Efficiency 

  To what extent are the costs associated with the ETS Guidelines proportionate to the benefits 

they have generated? 

EU added value 

  What is the additional value resulting from the fact that the Commission has adopted State 
aid Guidelines, compared to what could have resulted from a case-by-case assessment of the 
notified national ETS compensation schemes? 

Coherence 

  To  what  extent  is  the  indirect  CO2  cost  compensation  coherent  with  the  objective  of  the 
Green Deal Communication and the New Industrial Strategy for Europe Communication? 
  To what extent is the indirect CO2 cost support coherent with other interventions which have 

similar objectives? 

5.2.  Relevance 

  To what extent are the ETS Guidelines still relevant? 

o  To what extent does the original objective of the Guidelines to minimise the risk 
of  carbon  leakage  while  preserving  the  incentive  for  a  cost  effective 
decarbonisation  of  the  economy  without  creating  undue  competition  distortion 
still correspond to the needs of the EU? 

22 

 
 
5.2.1.  Implementation  of  ETS  costs  compensation  schemes  over  the 

third trading period 

The 2015 evaluation first analysed whether factors could explain the choice of Member States to 
implement schemes compensating for indirect ETS costs or not. The 2015 evaluation conducted 
an analysis of the drivers for the implementation of indirect ETS costs compensation schemes in 
six  Member  States  that  had  implemented  such  scheme  at  the  time.  The  evaluation  could  not 
identify  a  specific  economic  or  market  specific  driver  and  concluded that  these  decisions  were 
rather motivated by policy considerations.  

It analysed in particular the following factors: 

  Level and evolution of electricity prices: the cost of electricity varies from one Member 
State  to  another.  One  could  expect  Member  States  with  higher  electricity  prices  or 
Member States with a recent increase in electricity prices to favour the implementation of 
a compensation mechanism.  

  Level  of  electricity  taxes:  the  existence  of  other  types  of  support  for  electro-intensive 
industries  may  influence  Member  States’  decision  to  implement  indirect  ETS  costs 
compensation schemes. 

  Share  of energy-intensive  industry: the industrial  structure and  market  characteristics 
explain if some structural specificities of a Member State can worsen the situation for a 
sector and create discrepancies within Europe.  

  Political  considerations:  policy  makers  may  consider  a  range  of  policy  instruments  to 

reduce the risk of carbon leakage.  

The  paragraphs  below  update  that  analysis,  in  particular  by  taking  into  account  the  additional 
schemes implemented in various Member States in the period 2015-2019. 

Level and evolution of electricity prices  

The 2015 evaluation report considered the level of electricity prices, the evolution of electricity 
prices and the evolution of electricity prices against the evolution of producer price index. For all 
these parameters, the report concluded that they could not provide a clear explanation as to why 
Member States with an ETS compensation scheme in place took such decision.  

As presented in the 2015 evaluation report, a few points need to be considered before looking at 
historical electricity prices: 

  There is no reference for electricity prices for electro-intensive industries. Most of these 
prices are the result of bilateral contract negotiations with electricity suppliers ready to 
provide  advantageous  contractual  conditions  in  exchange  for  important  volume  of 
consumption. Therefore the electricity prices for large industries may serve as indicator 
for final prices but do not reflect the exact bill of electro-intensive industries. 

  The  retail  electricity  prices  consist  of  various  price  components:  wholesale  electricity 
prices,  sales  costs,  network  costs,  taxes  and  levies.  The  level  of  these  additional  cost 
components depend entirely on the type of consumers. 

  The  electro-intensive  consumers  often  benefit  from  exemptions  or  reductions  from 

certain taxes and levies (see section below). 

Having  clarified  these  points,  the  2017  electricity  prices  for  large  industrial  consumers  across 
Europe are presented in Figure 5 below. 

Figure 5: Electricity prices including all taxes and levies in €/KWh with all taxes and levies for 
large industrial consumers - year 2017 

23 

 
Notes: 

Source: 

Large  electricity  industrial  consumers:  20,000–70,000  MWh  per  year,  European  Union  category  is 
calculated as the average of EU members’ ratios (when data are available). 
Eurostat, data code nrg_pc_205 

As  shown  on  the  graph  above,  the  absolute  level  of  power  prices  does  not  explain  why  some 
Member States have implemented a compensation scheme and others not. Some Member States 
with high electricity prices have not implemented indirect cost compensation such as Denmark, 
Cyprus  and  Italy.  At the  same  time,  some  Member States  with  lower electricity  prices  in  2017 
compared  to  the  EU  average  have  implemented  a  compensation  mechanism  such  as  Finland, 
Luxembourg or Norway. 

Figure  6  below  presents  the  evolution  of  electricity  prices  for  Member  States  that  have 
implemented  a  compensation  scheme  in  2013  at  the  beginning  of  phase  3  of  the  EU  ETS.  It 
shows  that  in  the  United  Kingdom,  Spain,  Germany,  the  Netherlands  and  Greece,  this 
implementation occurred after a strong increase in power prices over the period 2011-2012. This 
trend is less visible for Belgium35 and Norway. 

35   Only  the  Flanders  region  of  Belgium  introduced  a  compensation  mechanism  in  2013.  The  Wallonia  region 

introduced it in 2018. However, one single price is provided for the two regions. 

24 

 
 
 
                                                           
Figure  6:  Evolution  of  electricity  prices  including  all  taxes  and  levies  for  Member  States  that 
have implemented a compensation scheme in 2013 - €/KWh 

Notes: 
Source: 

Large electricity industrial consumers: 20,000–70,000 MWh per year 
Eurostat, data code nrg_pc_205 

Member States that have implemented a compensation scheme at a later stage during phase 3 of 
the  EU  ETS  seem  to  follow  an  opposite  trend  (See  Figure  19  in  Appendix  B).  Compensation 
schemes were generally implemented after a period of decrease in power prices or after a phase 
of stagnation (e.g. Finland, Luxembourg and Slovakia). In this category, the exception is France 
that implemented the compensation after an increase in electricity prices. 

As regards Member States that have not implemented a compensation scheme, electricity prices 
in  these  Member  States  decreased  over  the  period  as  in  the  rest  of  Europe  (see  Figure  20  in 
Appendix B). This decrease in electricity prices could have been a driver for non-implementation 
of mechanisms. However some Member States presented above have decided to implement their 
support schemes exactly during this period. 

The  electricity  price  evolution  only  provides  information  regarding  the  additional  costs  for 
industry  without  providing  information  regarding  the  selling  prices  for  industrial  production. 
Power prices increased over the period 2009-2012 in most Member States. This increase occurred 
at the same time as an increase in the output price of industry. One could have expected to see a 
compensation  implemented  in  Member  States  for  which  the  output  prices  had  not  increased 
relatively to electricity prices, but historical data do not confirm this assumption (see Figure 21 in 
Appendix  B).  Indeed,  the  two  Member  States  with  an  increase  in  electricity  prices  but  with  a 
decrease  in  producer  index  over  the  period  2009-2012  are  Malta  and  Sweden  and  they  do  not 
have a compensation scheme in place.  

Overall,  it  can  be  concluded  that  few  Member  States  might  have  implemented  a  compensation 
scheme after an increase of power prices over the period 2011-2012, but the evolution of prices is 
probably not the main driver to explain the heterogeneity of compensation implementation within 
the  EU.  Looking  at  the  evolution  of  power  prices  against  the  output  price  of  industry,  the 
information  is  also  mixed,  and  this  parameter  cannot  provide  the  entire  picture  regarding  the 
reasons  behind  the  implementation  of a  compensation  scheme  related  to indirect  costs  in some 
Member States. 

Evolution of electricity taxes and other types of support 

Electro-intensive  industries  often  benefit  from  reduction  in  taxes,  levies,  fees  and  charges 
included in electricity or energy prices. Large industrial consumers generally pay around half the 
taxes  paid  by  small  industrial  consumers.  This  spread  has  widened  in  recent  years.  These 
differences  vary  across  Europe  as  shown  in  Figure  7  below.  One  could  expect  Member  States 

25 

 
 
with  no  compensation  scheme  to  provide  fiscal  advantages  and  similarly  those  with 
compensation measures to remove those for large industrial consumers.  

This  assumption  is  confirmed  on  the  graph  below  as  important  differences  can  be  observed 
between  large  industrial  prices  and  small  industrial  consumers  prices  (due  to  lower  taxes  and 
network charges) in some Member States without compensation mechanism. However, a similar 
spreads exist between these two prices in Member States with compensation mechanisms such as 
France, Germany, the Netherlands and Spain. Therefore, the role of tax and network charges on 
electricity in the implementation of support schemes in Europe is not conclusive. 

Figure 7: Composition of small (IB) and large (IF) industrial prices in 2017 

Notes: 

Source: 

Member States that have implemented a compensation mechanism related to indirect costs. 
Band  IB  corresponds  to  a  consumption  of  20–499  MWh  per  year  and  Band  IF  corresponds  to  70,000-
150,000 MWh per year. 
Report “Energy prices and costs in Europe”, European Commission. Data based on DG ENER in house 
data collection  

Electro-intensive industries may also receive different support measures to reduce their electricity 
bill, for example an interruptibility load schemes. These interruptibility schemes remunerate the 
industry  in  exchange  of  load  reduction  during  critical  periods  for  the  power  network.  To 
participate, the industrial plant needs to be flexible which means that it needs to be able to reduce 
quickly its electricity consumption when required by the transmission system operator.  

Overall,  Member  States  have  several  options  to  provide  additional  remunerations  to  electro-
intensive industries.  

In  conclusion,  the  analysis  on  other  supports  such  as  reduction  in  taxes  and  levies  or 
interruptibility  contracts  is  not  conclusive  to  explain  the  heterogeneous  implementation  of 
indirect ETS costs compensation scheme across Europe. 

Industry structure 

Current levels of industry GVA as a share of national GDP does not provide clear conclusions on 
the decisions regarding the implementation of compensation mechanisms. Several Member States 

26 

 
 
 
 
 
 
 
with  important  share  of  their  GDP  coming  from  industry  for  the  year  2016  (e.g.  Czechia  and 
Ireland) did not have existing compensation mechanisms.  

When looking at the evolution of this ratio over time, the picture is also mixed. For all Member 
States with an existing compensation scheme, the ratio has decreased or remained stable between 
2008 and 2016 (except for Lithuania and Slovakia). However, this evolution might be linked to 
the 2008 crisis and the evolution between 2012 and 2016 provide a different picture. Indeed, the 
picture is  mixed  over  this period  with  Member  States  showing  an  increase in  the  ratio  such  as 
France,  Lithuania  or  Slovakia  while  other  Member  States  facing  a  decrease  such  as the  United 
Kingdom, the Netherlands and Norway.  

Therefore, it cannot be concluded that this indicator is relevant to determine the reasons behind 
the  implementation  of  a  compensation  scheme  as  the  picture  is  also  mixed  for  Member  States 
without compensation. 

Figure 8 below presents the share of industry electricity consumption over the total industry GVA 
for  each  Member  State.  This  ratio  was  slightly  different  in  the  2015  Evaluation  report.  The 
previous  report  presented  the  ratio  between  energy  consumption  and  GVA.  It  was  decided  to 
modify  this  graph  in  order  to  represent  the  electricity  consumption  that  is  more  relevant  for 
indirect ETS cost compensation. It is interesting to notice that four out of the five Member States 
with highest ratios have introduced a compensation mechanism.  

However, this ratio is not a differentiating factor as some Member States with an existing scheme 
have very low ratios such as Germany, the United Kingdom and the Netherlands. Here again the 
conclusions are mixed. 

Figure 8: Electricity consumption over GVA 

Notes: 

Source: 

European Union is calculated as the average of EU members averages (when data countries were 
available). In thousands tonnes of oil equivalent per million euros. 
Eurostat, source code sbs_na_ind_r2,  sbs_na_con_r2 and nrg_110a. 

The same conclusions are visible on the graph in Figure 9 below that presents the part of GVA of 
eligible  sector  to  indirect  ETS  costs  compensation  under  the  2012  ETS  Guidelines  over  the 
Member States’ GVA. The part of eligible sectors are equally split between Member States with 
and without existing compensation mechanisms. 

Figure  9:  GVA  of  eligible  sector  under  the  2012  ETS  Guidelines  over  total  Member  States 
industrial GVA- year 2016 

27 

 
 
Source: 

Eurostat, source code sbs_na_ind_r2  

In  conclusion,  no  stand-alone  criteria  based  on  the  industry  structure  can  justify  why  some 
Member States have implemented a compensation scheme or not. The importance of industry for 
the  Member  States  does  not  provide  conclusive  messages  nor  does  the  industrial  electricity 
consumption  within  Member  States.  The  repartition  of  sectors  eligible  to  indirect  ETS  costs 
compensation under the 2012 ETS Guidelines over Member States also provide a mixed picture. 

Trade exchanges  

The  large  majority  of  Member  States  with  existing  compensation  schemes  have  an  important 
percentage  of  their  trade  occurring  with  countries  outside  Europe.  The  main  exceptions  are 
Luxembourg,  Slovakia  and  Belgium.  However,  some  Member  States  with  important  share  of 
trade being done with countries outside Europe have not implemented a compensation scheme, 
such as Italy and Ireland. 

A large majority of Member States in central-western Europe have implemented a compensation 
scheme  (see  map  in  Implementation  /  State  of  Play  above).  These  decisions  might  have  been 
driven  by  previous  decisions  taken  by  neighbouring  markets.  Only  few  markets  (Lithuania, 
Slovakia and Greece) have implemented a compensation scheme in isolation without the measure 
being  present  in  neighbouring  EU  markets.  These  three  countries  might  have  implemented  a 
compensation  mechanism  for  different  reasons:  a  direct  and  close  competition  with  non-EU 
neighbouring markets or important trading partners located in Member States having a scheme in 
place.  

The analysis of main trading partners of Member States that have implemented a compensation 
scheme shows that these Member States have strong business relations with other Member States 
in  the  same  situation.  Lithuania,  Slovakia  and  Greece  have  strong  commercial  relation  with 
Germany and this might explain the choice of implementing a compensation scheme. However, 
similar  trends  exist  for  Member  States  with  no  existing  compensation  scheme.  Most  of  these 
markets  have  strong  business  relations  with  Member  States  that  have  implemented  a 
compensation scheme. This trend is particularly significant for Denmark, Ireland and Italy. 

Some  Member  States  might  have  implemented  a  compensation  scheme  because  their  trading 
partners  have  one,  being  in  their  neighbourhood  or  not.  However,  based  on  the  historical  data 
presented  above,  the  opposite  trend  also  exists.  Therefore,  no  clear  conclusion  on  the  link 
between commercial partners within Europe and compensation mechanism can be presented. 

28 

 
 
Policy considerations 

The  2015  evaluation  stated  that  energy  intensive  industries  have  a  strategic  position  in  the 
economic value chain of many Member States and that this may be the reason why some Member 
States have decided to implement indirect ETS costs compensation schemes.  

Contributions  received  from  Member  States  in  the  targeted  consultation  show  that,  for  those 
Member  States  that  have  implemented  an  indirect  ETS  costs  compensation  scheme,  the  main 
reason  invoked  is  the  need  to  avoid  carbon  leakage.  Greece  highlighted  that  it  is  particularly 
vulnerable  due  to  its  geographical  location,  France  mentioned  the  need  to  limit  distortions  of 
competition within Europe and Slovakia also referred to the low administrative burden for setting 
up and managing the scheme.  

For those Member States not having implemented an indirect ETS costs compensation scheme, 
budgetary  constraints  or  the  use  of  the  funds  from  the  auctioning  of  free  allowances  for  other 
purposes are two of the main considerations for not implementing a scheme. Ireland and Malta 
argue  that  few  beneficiaries  would  have  been  eligible.  Sweden  explained  that the  indirect  ETS 
costs compensation is fundamentally inconsistent with the ETS objectives and should be phased 
out. Czechia is considering introducing a scheme in the next trading period since the CO2 price 
has increased and since the neighbouring Member States have implemented or are implementing 
a similar scheme. The increase in CO2 prices in early 2018 was also the main reason for Poland to 
recently  decide  to  introduce  a  scheme.  Italy  also  added  that  CO2  prices  were  low  in  the  third 
trading  period  and  that  there  is  a  lack  of  empirical  evidence  on  the  effectiveness  of  such 
compensation in preventing carbon leakage.  

As it was already noticeable from the 2015 Evaluation, it appears that policy considerations are 
the  main  driver  for  Member  States  deciding  to  implement  or  not  an  indirect  ETS  costs 
compensation  scheme.  Other  factors,  such  as  the  level  and  evolution  of  electricity  prices,  the 
evolution  of  electricity  taxes  and  other  types  of  support,  the  industry  structure  within  Member 
States,  and  trade  exchanges  among  Member  States  and  with  third  countries  do  not  provide 
conclusive  correlation  that  would  explain  the  choice of  Member  States  to  implement  or  not  an 
indirect  ETS  costs  compensation  scheme.  This  is  confirmed  by  contributions  from  Member 
States to the consultation activities.  

5.2.2.  Evolution of the legal and economic frameworks over the third 

trading period 

Evolution of the CO2 price 

As shown in Figure 10, the carbon price in the EU ETS market has stayed at a low level between 
2012 and 2017, with an average price of 7€/tCO2 as a result of emission allocation oversupply 
and an inflexible market  design. This low and flat trend has changed radically since mid-2017. 
The  carbon  price  increased  from  about  5€/tCO2  in July  2017  to  above  25€/tCO2  in  May  2019. 
This steep rise in carbon prices since mid-2017 was mainly driven by the entry into force of the 
revised EU ETS Directive in April 2018, with reinforced decline in the annual emission cap and 
the  Market  stability  reserve  (MSR),  improving  the  balance  between  demand  and  supply  of 
allowances of the EU ETS scheme.  

Figure 10: Evolution of the carbon prices in the EU ETS market (2015-2019) 

29 

 
Source: 

Energy market prices 

The up to date market view for the Phase 4 of EU ETS is that the current level of carbon prices is 
expected  to  remain.  Figure  11  presents  a  benchmark  exercise  of  available  carbon  prices 
projections. According to this benchmark, carbon prices in the EU ETS are expected to remain in 
the  range  15-35€/tCO2  in  Phase  4,  creating  higher  direct  and  indirect  costs  for  European 
industries compared to the previous EU ETS phases. 

Figure 11: Benchmark of carbon price projections (2021-2030) 

Note: 
Source: 

The benchmark was performed in April 2019. 
Compass Lexecon research based on EC, AIE, Energy aspects, Thomson Reuters, Point Carbon, ICIS, JP 
Morgan, Nomisma energia, BNEF 

Evolution of the legal framework over the third trading period 

As  mentioned  in  1.1.3  above,  the  ETS  Directive  has  been  revised  in  2018  for  the  next  trading 
period. Under the revised Directive, the calculation method used to determine sectors exposed to 
carbon  leakage  risk  has  changed.  Article  10(b),  paragraph  1  of  the  revised  Directive  defines 
sectors  deemed  to  be  at  risk  of  carbon  leakage  as  those  where  the  product  exceeds  0.2  from 
multiplying their trade intensity by their emission intensity (measured in kgCO2/GVA), whereas 
the  2012  ETS  Guidelines  refer  to  trade  intensity  and  indirect  ETS  costs  and  use  them 
independently from each other (see description in 2.1.3 above). 

30 

 
 
 
 
The revised  ETS  Directive  also  introduced  market  reform  measures  to  improve  the  stability  of 
EU ETS and to tackle the oversupply problem. The Market Stability Reserve (MSR) started in 
2019,  aiming  at  neutralizing  the  negative  impacts  of  the  existing  allowance  surplus  and  at 
improving the system’s resilience to future shocks.  

The modifications of the EU ETS legal framework introduced by the revised ETS Directive have 
an  impact  on  the  functioning  of  the  EU  ETS,  which  is  the  reference  framework  for  the  ETS 
Guidelines.  For  the  next  trading  period,  ETS  Guidelines  remain  relevant  to  the  extent  they  are 
aligned with the revised ETS Directive and the changes introduced in the EU ETS. 

5.2.3.  Conclusion 

As  already  reported  in  the  2015  evaluation,  it  is  not  possible  to  establish  a  clear  relationship 
between economic or market factors and decisions from Member States to implement or not an 
indirect ETS costs compensation scheme. Political considerations seem to remain the main driver 
for Member States in this regard. 

However, the increase of the CO2 price in the last years of the third trading period as well as the 
forecast of a continuously high CO2 price during the fourth trading period is an indication that the 
ETS  guidelines  remain  relevant  as  the  risk  of  carbon  leakage  has  not  vanished.  As  shown  by 
figures  presented  in  section  3  above,  since  the  increase  of  the  CO2  price  in  2017,  additional 
Member States have decided to implement an indirect ETS costs compensation scheme and the 
amount of compensation allocated by Member States has also increased in the recent years. Such 
remaining  risk  is  also  acknowledged  by  the  revised  ETS  directive,  which  set  the  definition  of 
sectors  at  risk  of  carbon  leakage  due  to  the  ETS.  It  is  therefore  relevant  to  maintain  ETS 
Guidelines for the next trading period, while revising them to adapt them to the evolution of the 
economic situation and the legal framework of the EU ETS.  

5.3.  Effectiveness 

  To  what  extent  did  the  ETS  Guidelines  successfully  achieve  the  three  objectives 

pursued? 

o  To what extent did the ETS Guidelines adequately  minimise the risk of carbon 

leakage at the minimum cost? 

o  To what extent did the ETS Guidelines prevent undue competition distortions? 
o  To what extent did the ETS Guidelines preserve the incentive for cost effective 

decarbonisation of the economy? 

In the 2015 evaluation the effectiveness of indirect cost compensation could not be determined 
sufficiently, mainly because of the lack of evidence for carbon leakage. 

The  Impact  Assessment  of  the  2012  ETS  Guidelines  concluded  that  monitoring  and  reporting 
procedures  would  have  allowed  the  Commission  to  assess  progress  towards  the  specific 
objectives  of  the  initiative.  The  Commission  should  have  received  precise  and  comprehensive 
reports on any aid granted in different Member States including aid amounts and the sectors to 
which aid has been paid. That data was meant to inform the assessment of the extent of possible 
distortions in the internal market. However, as already outlined in paragraph 4.2 above, the data 
collection suffered from inconsistent and incomplete reporting. That Impact Assessment was also 
based on the assumption that the carbon price would be around 30€/tCO2. Sensitivity tests were 
also  carried  out,  using  carbon  prices  lower  (10  and  20€/tCO2)  and  higher  (40€/tCO2)  than  the 
primary price assumption. As already mentioned in paragraph 5.2.2, the average carbon price in 
the EU ETS market between 2012 and 2017 was 7€/tCO2, therefore even below the lowest price 
used for the sensitivity analysis.  

Taking into account the difficulties linked to above-mentioned considerations, the evaluation of 
the  effectiveness  is  based  on  recent  literature,  on  the  outcome  of  the  public  and  targeted 
consultations  and  is  supported  by  the  JRC  Technical  Report  which  provides  some  insights  by 

31 

 
 
 
analysing  the  available  data  from  the  reports  to  determine  the  impact  of  indirect  cost 
compensation on certain performance indicators.  

The  JRC  Technical  Report  is  based  on  the  information  in  the  records  on  the  beneﬁciaries  of 
indirect cost compensation that were provided to the Commission by the Member States with an 
approved State Aid under the EU ETS Guidelines. The data was then linked to the Orbis Bureau 
Van Dijk database, which contains balance sheet information of ﬁrms.  

The JRC analysis comprises ﬁrms operating in 12 Member States - 6 of which provide funding 
for indirect cost compensation, belonging to 27 diﬀ erent sectors, for the period 2009–2017. The 
report  looks  at  ﬁrms  operating  in  all  eligible  sectors,  as  well  as  on  the  subgroup  from  the 
aluminium sector. 

This data allowed to compare the average change in performance for a group of ﬁrms receiving 
compensation  with  the  one  of  a  similar  group  of  ﬁrms  that  operate  in  the  absence  of  aid, 
following  a  Diﬀ erence-in-diﬀ erences  (DiD)  approach36.  Such  approach  consists  in  taking  the 
diﬀ erence  of  the  outcome  before  and  after  the  treatment  for  ﬁrms  in  the  control  group  and 
subtracting it from the same diﬀ erence observed among ﬁrms in the treated group.  

5.3.1.  Minimisation of carbon leakage  

The impact assessment report of the 2012 ETS Guidelines recalled that the first specific objective 
is  to  prevent  carbon  leakage.  The  2012  impact  assessment  report  further  details  that  carbon 
leakage means that even if the GHG emissions reduction target of the EU ETS is met, that effect 
may  be  impaired,  neutralized  or  even  outweighed  by  an  increase  in  CO2  emissions  outside  the 
ETS following relocation by EU firms in ETS sectors due to the higher costs imposed by the EU 
ETS.  

The gap in electricity prices between Europe and other parts of the world put EU industries at a 
competitive disadvantage, and this disadvantage may be exacerbated by rising carbon costs. As 
shown  in  Figure  12,  Europe  has  higher  electricity  costs  than  China  and  the  United  States  for 
industry. 

36   A simple comparison between the performance of ﬁrms receiving the intervention and those not receiving it after 
the  inception  of  the  indirect  cost  compensation  would  not  appropriately  capture  its  eﬀ ects  on  the  outcomes 
considered because it would not consider diﬀ erences in the pre-intervention period. 

32 

 
 
 
 
                                                           
Figure 12: European, US, Chinese and Japanese retail electricity prices for industry 

Source: EC, Enerdata, 2019 

This  evaluation  has  updated  the  results  of  the  2015  evaluation  in  this  respect  by  analysing  the 
more recent literature and checking those results against the outcome of the public and targeted 
consultations.  In  addition,  this  evaluation  also  builds  on  the  results  of  the  study  conducted  by 
JRC (see below). 

Literature review 

In line with the 2015 Evaluation’s conclusion, the results of the updated literature review suggest 
that up to date there is no hard evidence of carbon leakage caused by EU ETS. All the results of 
the updated literature review are presented in Appendix A to this evaluation.  

However, there are several factors that need to be considered before drawing final conclusions on 
carbon leakage.  

Many  recent  empirical  studies  still  focus  on  the  first  two  phases  of  EU  ETS,  the  number  of 
empirical  studies  with  extension  to  Phase  3  is  very  limited  and  so  far,  no  published  study  has 
explored  the  very  recent  period  with  relatively  high  carbon  price.  However,  when  more  recent 
data is tested, some research shows that the impact of carbon pricing is more significant for this 
period, although these results are not representative of the industry as a whole. It remains to see 
whether  future  studies  that  include  persistent  high  carbon  prices  could  find  larger  impacts  of 
carbon prices on industry competitiveness and decisions to relocate installations outside the EU, 
leading to carbon leakage.  

From  the  short-term  perspective  (as  presented  Appendix  A),  the  lack  of  evidence  of  carbon 
leakage  may  have  multiple  explanations,  ranging  from  over-allocation  of  emission  allowances, 
persistent low carbon price until mid-2017, some ability of firms to pass-through additional costs, 
the relatively low share of energy costs in the EU compared with other regions of the world, the 
effect of the existing anti-carbon leakage measures, to innovations in energy efficient industrial 
processes stimulated by carbon regulation. All these factors may have safeguarded to some extent 
the  industries  against  negative  impacts  of  the  carbon  pricing  on  competitiveness  and  carbon 
leakage. Additionally, other fundamental cost drivers, such as other components of energy costs, 
labour  costs  as  well  as  taxation  may  have  an  offsetting  or  countervailing  effect  on  firms’ 
production decisions. 

33 

 
 
 
 
 
 
From  the  long-term  perspective  (as  presented  in  Appendix  A),  the  lack  of  evidence  through 
investment  channel  may  be  related  to  the  time  that  such  effects  take  to  materialise.  Indeed, 
investment  cycles  are  typically  long,  and  capital  stock  is  long-lived  in  most  industrial  sectors, 
meaning  that  carbon  leakage  would  only  materialise  at  the  moment  of  investment  or 
reinvestment. Given that 14-years’ experience of EU ETS is relatively short compared with the 
typical industrial capital stock life, the long-term carbon leakage effects may need to be assessed 
over  a  longer  period  of  time  and  it  may  be  too  early  to  provide  any  definitive  conclusion. 
Additionally, the lack of evidence of carbon leakage could also imply that the effects of EU ETS 
on  altering  investment  decisions  and  on  stimulating  innovations  cancel  out  each  other,  or  that 
some  of  the  other  fundamental  cost  drivers,  such  as  other  components  of  energy  costs,  labour 
costs as well as taxation may have a countervailing effect on firms’ investment decisions.  

Finally, as stated in the 2015 Evaluation, the fact that carbon leakage did not happen in the past 
when carbon prices were relatively low does not mean that it will not happen in the future. The 
recent increase of the ETS carbon price suggests that careful monitoring and additional empirical 
studies  leveraging  more  recent  data  may  provide  different  results  on  the  evidence  of  carbon 
leakage (Nordic Council of Ministers, 2019; Healy et al., 2018). 

Consortium analysis of the risk of carbon leakage of sectors 

The analysis conducted by the Consortium based on publicly available economic data and cross-
checked with the information and data received in the targeted consultation of interested sectors, 
covered also the sectors eligible under the 2012 ETS Guidelines (for more information on the use 
of data, see Annex 2). Even if that analysis is forward looking, it shows that for some of those 
sectors the existence of a risk of carbon leakage is confirmed for the fourth trading period. The 
Consortium assessed different criteria: the market characteristics of the sector (existing and future 
trade patterns; whether the sector is price taker or price maker on the market; the market structure 
and the bargaining position of the sector), its profit margins (current and long-term situation in 
the EU, feasibility of relocation of activity outside the EU) and its abatement potential (current 
electricity consumption levels in the sector, the adoption of the best available technologies within 
the sector and its impact on profit margins). This sectorial analysis show that some sectors see 
their profit margins strongly impacted by indirect ETS costs. For those that are not in a position 
to pass-through these indirect ETS costs to their downstream customers or do not have potential 
for energy efficiency gains, indirect ETS costs can trigger a risk of carbon leakage.  

Stakeholders responses to consultation activities 

To  the  question  whether  the  implementation  of  compensation  schemes  by  Member  States 
prevented carbon leakage, 41.9% of respondents to the public consultation replied negatively and 
7.3%  positively.  As  87%  of  the  total  respondents  to  the  public  consultations  were  industrial 
stakeholders, those percentages are not indicative of more general trends. 

Respondents with a positive opinion of the impact of compensation schemes to prevent carbon 
leakage  are  mostly  industrial  stakeholders located in Poland,  which  introduced a  compensation 
scheme in 2019. Those stakeholders explain that, in combination with a low CO2 price, it has had 
a  positive  influence  on  carbon  leakage  risk.  Reference  is  also  made  to  other  compensation 
mechanisms having an impact on costs of undertakings, such as, at EU level, the granting of free 
allowances, and at national levels reductions in financing of production of renewable energy.  

Respondents  having  replied  negatively  to  the  question  are  also  almost  entirely  industrial 
stakeholders belonging to both sectors eligible for compensation (e.g. aluminium) and sectors not 
eligible (cement). Those replies  mainly  present elements  related  to  design  of  the  compensation 
schemes to justify that they did not help preventing carbon leakage. In particular, the fact that not 
all  Member  States  have  implemented  compensation  schemes,  and  for  those  who  did,  not 
necessarily in the same manner (e.g. with different levels of aid intensity) is criticised. The fact 
that only partial and degressive compensation could be granted, based on historical output, is also 

34 

 
 
perceived negatively. Some industries say that the compensation cannot be fully effective unless 
it compensates 100% of the indirect costs. However, there is no evidence presented that would 
have  quantitatively  assessed  the  optimal  level  of  compensation  which  makes  it  challenging  to 
demonstrate the need for a full compensation. 

Respondents also  point  the  lack  of  visibility  of  the  regulatory  framework  for  the  coming  years 
that prevent long-term investments. 

It is to be noted that many negative replies came from sectors not eligible to indirect ETS costs 
compensation  under  the  2012  ETS  Guidelines  (or  from  companies  located  in  a  Member  State 
with  no  compensation  scheme  in  place).  Moreover,  even  if  a  majority  of  stakeholders  replied 
negatively on the prevention of carbon leakage, very few concrete examples of carbon leakage 
have  been  provided  by  the  respondents.  Only  three  sectors37    (among  which,  two  were  not 
eligible  for  compensation  under  the  2012  ETS  Guidelines)  provided  specific  examples  of 
production sites shut down in Europe due to increased electricity costs. Some other sectors38 refer 
to relocation decisions without providing evidence that they are related to indirect ETS costs. 

Of the 10 Member States with a scheme in place having responded to the targeted consultation 
(Belgium,  Germany,  Greece,  Spain,  Finland,  France,  Lithuania,  Luxemburg,  Netherlands, 
Slovakia)  and  Norway,  the  majority39  mentioned  the  need  to  avoid  carbon  leakage  as the  main 
consideration  for  implementing  a  scheme.  Greece  highlighted  that  it  is  particularly  vulnerable 
due  to  its  geographical  location.  France  mentioned  the  need  to  limit  distortions  of  competition 
within Europe. 

In  addition,  in  their  reply  to  the  targeted  consultation  to  the  Member  States,  the  Netherlands 
summarised  the  results  of  a  voluntary  evaluation  of  the  national  scheme  in  2017.  The  reply 
explains that the evaluation was based on a statistical comparison between the beneficiaries of the 
scheme  and  a  control  group  of  firms  outside  the  scope  of  the  scheme  and  that  the  conclusions 
were  generally  positive.  On  the  possible  improvements,  the  evaluation  suggested  to  focus  the 
scheme to a greater extent on companies where indirect electricity costs as a consequence of the 
ETS  have  the  greatest  adverse impact  on  international  competitiveness.  For example,  the  reply 
explains  that  the  evaluation  argues  that  the  risk  of  carbon  leakage  is  lower  on  markets  where 
transport costs account for a larger share of total costs, where product variations are greater and if 
the impact of electricity costs on value added is small. 

JRC study 

The  effectiveness  of  the  ETS  Guidelines  at  the  firm  level  is  assessed  based  on  some  relative 
measures  of  firms’  performance  -  namely:  labour  productivity  (turnover/employees),  assets  per 
employee  (total  assets/employees)  and  on  some  variables  in  absolute  terms,  i.e.  turnover 
(operating revenue), total assets and number of employees. The indicators selected by JRC cannot 
however be considered as being able to capture the occurrence of carbon leakage, but are only 
proxies  that  could  provide  some  indications  of  the  existence  of  such  a  risk.  In  particular, 
competition  distortion  is  measured  in  terms  of  the  effects  of  the  intervention  on  per  worker 
measures  of  turnover  and  value  of  total  assets.  The  risk  of  carbon  leakage  is  evaluated  on  the 
basis of firm-level indicators of turnover, value of total assets and number of employees.40  

37   These three sectors are: 23.51 Manufacture of Cement, 24.42 Aluminium production (closure of 1/3 of capacities 

since 2005) and chlorine and caustic production. 

38   These sectors are mainly 26.50 - Manufacture of cement, lime and plaster; 23.51 - Manufacture of cement; 24.42 - 
Aluminium production; 24.10 - Manufacture of basic iron and steel and of ferro-alloys; 24.52 - Casting of steel; 
24.45 - Other non-ferrous metal production. 

39   Belgium, Germany, Greece, Spain, Finland, France, Luxemburg, the Netherlands, Slovakia, Norway. 

40   The JRC Technical Report explains that turnover measures ﬁrm performance in terms of the value of the services 
and goods sold. It is widely considered as one of the main factors to assess the economic growth of a company. 
Another reason that makes this choice seem  more appropriate to the speciﬁc case under analysis is that while a 
pure measure of proﬁt might suﬀ er from potential proﬁt shifting practices, turnover is unlikely to be aﬀ ected by 

35 

 
                                                           
 
The findings of the study conducted by the JRC are in line with the existing literature analysing 
single country interventions (mainly on tax exemptions and tax refunds)41. The results presented 
in  the  JRC  Technical  Report  suggest  that  “receiving  compensation  for  indirect  costs  does  not 
have a statistically significant impact on labour productivity of firms in comparison to those that 
do  not  receive  funding.  Conversely,  the  evidence  points  to  a  negative  effect  on  performance 
measured in terms of turnover, value of total assets and employment”. 

Those results are difficult to justify. This might be due to a multitude of factors that affect firms’ 
economic performance.  

As  far  as  the  analysis  on  aid  intensity  is  concerned,  which  only  contemplates  a  more 
homogeneous pool of firms operating in aiding countries, a higher level of subsidies appears to 
reduce the risk of carbon leakage, as performance measured in terms of turnover, value of total 
assets  and  number  of  employees  improves.  Specifically,  the  estimated  coefficients  imply  that 
firms receiving a higher subsidy experience a positive and significant impact on the measures of 
turnover, total assets and employment considered, in comparison to businesses that receive lower 
aid amounts. 

Estimated coefficients suggest that, for each 1% increase in the amount of the subsidy received 
(i.e. around 1,000 EUR), firms expand their turnover and their assets value by 0.01%, and their 
workforce by 0.07%. This effect is however marginal. 

5.3.2.  Prevention of competition distortions  

Another specific objective of the 2012 ETS Guidelines is to minimise distortion of competition in 
the internal market. This section triangulates the results of the internal case practice, the outcome 
of  the  public  consultation, and  the  results  of the JRC  study  (see  Error!  Reference  source  not 
found. below). 

Regarding  competition  distortion  within  the  EU,  the  fact  that  only  12  Member  States  have 
implemented a scheme compensating for indirect ETS costs could in principle have created intra-
sector distortions when the compensation is implemented only in some Member States, or due to 
different levels of compensation across Member States with a compensation scheme in place. 

The outcome of the public consultation 

This  conclusion  seems  to  be  corroborated  by  some  replies  to  the  public  consultation.  In  fact, 
respondents to the public consultation had mitigated views on the impact of indirect ETS costs 
compensation on competition distortion across the EU: less than 1/3 (30.65%) of the respondents 
replied  that  it  had  no  impact  and  approximately  the  same  percentage  (29.84%)  of  respondents 
replied  that  it  had  one.  Some  industrial  sectors42  (eligible  to  receive  indirect  ETS  costs 
compensation) explain that they are facing competition mainly with extra-EU production, mostly 
from regions without carbon cost and that the indirect ETS costs compensation has mitigated to 
some  extent the adverse effects  of  globally  distorted level  playing  field  between  EU  producers 

these operations. Another way to look at ﬁrms’ growth is to investigate the opportunity for the ﬁrm to expand its 
business.  In  this  vein,  total  assets  can  be  considered  as  a  proxy  of  ﬁrms’  investment  activities,  as  this  measure 
allows  detecting  expansions  or  shrinkages  of  the  ﬁrms’  assets  endowments.  Finally,  the  number  of  employees 
serves as a proxy for ﬁrm size and helps identifying the potential risk of carbon leakage in terms of jobs loss. 
41   Existing  works  investigate  the  effects  of  energy-related  interventions  in  Finland  (Laukkanen  et  al.,  2019), 

Germany (Flues and Lutz, 2015) and in the United Kingdom (Martin et al., 2014) 

42   This feedback mainly came from the following businesses: Aluminum, steel, copper and ferro-alloys. 

36 

 
 
 
                                                                                                                                                                            
and  international  producers.  However,  other  sectors43  (not  eligible  to  indirect  ETS  costs 
compensation or located in a Member State with no compensation scheme in place) argue on the 
contrary  that  the  indirect  ETS  costs  compensation  has  created  market  distortions,  both  inter-
sector and intra-sector.  

JRC study 

As  stated  above,  the  JRC  study  concludes  that  the  indirect  cost  compensation  had  little  or 
negligible impact on turnover per worker and value of total assets per employee. It is therefore 
very difficult to derive any indication on distortions of competition on this basis. As far as the 
analysis  on  aid  intensity  is  concerned,  which  only  contemplates  a  more  homogeneous  pool  of 
firms  operating  in  aiding  countries,  JRC  concludes  that  higher  compensation  amounts  do  not 
seem to generate competition distortion. 

5.3.3.  Preservation of the incentive for cost effective decarbonisation of 

the economy  

The impact assessment report of the 2012 ETS Guidelines recalled that another specific objective 
is maintaining the efficiency of the EU ETS. 

The  formula  for  the  calculation  of  the  aid  amount  foreseen  in  the  2012  ETS  Guidelines  only 
allowed for a partial compensation of indirect ETS costs. First, the aid intensity was limited to 
85% (at the start of the trading period) and was degressive, and second, the efficiency benchmark 
parameter in the calculation formula was set by reference to the most electricity-efficient method 
of production for the product considered, which means that any installation that is not using the 
best  available  technique  would  not  receive  the  highest  possible  aid  amount.  Such  partial 
compensation  is,  in  principle,  an  element  that  contributed  to  maintaining  the  incentives  to 
improve energy efficiency. 

In  addition,  some  Member  States  (Belgium,  the  Netherlands,  Poland)  introduced  extra-
requirements in the design of their indirect ETS costs compensation scheme, as they imposed to 
beneficiaries  to  participate  in  an  energy  management  system  or  to  undergo  energy  audits  to 
benefit  from  indirect  ETS  costs  compensation.  Such  additional  requirement  was  aimed  at 
ensuring that beneficiaries of indirect ETS costs compensation will actively undertake measures 
to become more energy efficient.  

Public consultation responses indicate that the Guidelines have not hindered the incentive for the 
industry to improve energy efficiency: 57% of respondents state that the amount of compensation 
for  indirect  ETS  emission  costs  has  not  undermined  the  incentive  for  decarbonisation  of  the 
economy,  while  only  6%  of  the  respondents  say  it  has.  Many  respondents  explain  that  the 
compensation of indirect ETS emission costs did not undermine the incentive to decarbonise as 
energy costs represent a significant cost item for electro-intensive industries and therefore energy 
efficiency  is  necessary  to  maintain  their  competitiveness.  Some  even  say  that  it  increased  the 
incentive for industries to decarbonise because it makes electricity more attractive compared to 
fossil  fuel  energies.  However,  climate  associations  point  out  that  GHG  emissions  have  not 

43   The  following  sectors  mentioned  inter-sector  competition  distortions:  Glass  sector  being  in  competition  with 
aluminum,  plastics  and  paper  in  the  packaging  sector  –  Cement  sector  competing  with  other  materials  in  the 
construction  market  (such  as  steel).  The  feedback  about  intra-sector  distortions  due  to  the  fact  that  only  some 
Member  states  are  compensating  come  from  three  types  of  sources.  First,  from  eligible  sectors  with  companies 
located in countries without scheme (copper in Bulgaria, aluminum in Sweden and Ireland, manufacture of basic 
iron and steel and of ferro-alloys partially compensated in Spain, paper industry in Italy, steelmakers in Czechia). 
Second,  from  sectors  not  eligible  to  indirect  ETS  costs  compensation  (glass,  mining  of  other  non-ferrous  metal 
ores, other mining and quarrying, oil and gas, salt producer). Third, from global professional associations covering 
several sectors or from NGO’s. 

37 

 
 
                                                           
decreased in Europe and highlighted that compensations undermine companies and governments’ 
incentives for decarbonisation. 

Eurostat data on total GHG emissions trend for the Union, in the period from 1990 to 2017 show 
that there was a general downward trend to emissions during the 1990–1999 period (aside from a 
relative peak in 1996, when a cold winter led to an increase in heating requirements). From 1999 
to  2006  the  evolution  of  GHG  emissions  within  the  EU-28  remained  relatively  unchanged, 
although it started falling at a modest pace through to 2008. The year 2009 saw a sharp drop in 
emissions as a consequence of the global ﬁnancial and economic crisis and the resulting reduced 
industrial activity. Emissions increased in 2010 and decreased again from 2011 onward. In 2015, 
GHG emissions slightly increased compared to 2014. In 2016 the decreasing tendency returned. 
Emissions increased by 0.7% (30 million tonnes of CO2-equivalents) between 2016 and 2017.44 

Figure 13: Total greenhouse gas emissions (including international aviation and indirect CO2, 
excluding LULUCF) trend, EU-28, 1990–2017 (Index 1990 = 100)  

Source: 

Eurostat (env_air_gge), European Environment Agency 

Across  EU  Member  States  in  2017,  GHG  emissions were the  highest  in  Germany  (21%  of  the 
EU-28  total  or  936  million  tonnes  of  CO2-equivalents),  followed  by  the  United  Kingdom  and 
France. The  biggest  decreases compared to 1990  were  reported  for  Lithuania,  Latvia,  Romania 
and Estonia (– 57 %, – 56 %, – 54 % and – 48 % respectively). On the other side of the spectrum, 
the  biggest  increases  compared  to  1990  were  reported  for  Cyprus  (+ 56  %),  Portugal  (+ 23  %) 
and Spain (+ 22 %)45. 

As for the risk of carbon leakage, it is difficult to obtain evidence of the impact of the 2012 ETS 
Guidelines on the decarbonisation of the Union economy. The JRC Technical Report highlights 
that  no  data  is  available to  assess  the impact that indirect  cost compensation  has  had  on  ﬁrms’ 
behaviour in terms of electricity consumption, as not all Member States transmitted the relevant 
information in the reporting. In addition, the EU ETS is one of the main EU initiatives to reduce 
emissions, but it is not the only one (for example, the “Eﬀ ort Sharing Decision” which monitors 
the implementation of Member States’ emission reduction targets in the sectors outside the EU 

44  “Greenhouse  gas  emission  statistics 

inventories” 
https://ec.europa.eu/eurostat/statistics-explained/pdfscache/1180.pdf  
inventories” 
https://ec.europa.eu/eurostat/statistics-explained/pdfscache/1180.pdf  

45  “Greenhouse  gas  emission  statistics 

-  emission 

-  emission 

(data 

from  June  2019)  available  at: 

(data 

from  June  2019)  available  at: 

38 

 
 
 
 
                                                           
ETS46, the introduction of targets to increase renewable energy sources to 20 % by 202047 and to 
increase  Europe’s  energy  eﬃciency  by  20  %  by  202048).  The  granting  of  free  allowances  may 
also distort the price signals created by the EU ETS. It is therefore essential that the aid is limited 
to  the  minimum  necessary.  This  conclusion  seems  to  be  confirmed  by  the  results  of  the 
evaluation  carried  out  by  the  Netherlands  at  national  level  in  2017,  which  concluded  that  it  is 
important to focus the scheme on companies where indirect electricity costs as a consequence of 
the ETS have the greatest adverse impact on international competitiveness. 

5.3.4.  Horizontal issues  

As regards the formula for the calculation of the aid amount set in the 2012 ETS Guidelines, the 
evaluation of how some of the parameters have been applied was performed. These parameters 
affect in various ways the three objectives pursued by the 2012 ETS Guidelines. 

The CO2 emission factor 

An assessment of how the electricity market integration in the Union has developed during the 
period 2008-2017 shows that only some of the regions defined in the 2012 ETS Guidelines for 
the  purpose  of  setting  the  CO2  factor  continued  to  meet  the  price  convergence  condition 
established by the 2012 ETS Guidelines throughout the period.  

Figure 14: Day-ahead price convergence in Europe – 2008–2017 (% of hours) 

46   Decision 406/2009/EC of the European Parliament and of the Council of 23 April 2009 on the effort of Member 
States  to  reduce  their  greenhouse  gas  emissions  to  meet  the  Community’s  greenhouse  gas  emission  reduction 
commitments up to 2020, OJ L 140 (5.6.2009, p.136). 

47   Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the 
use  of  energy  from  renewable  sources  and  amending  and  subsequently  repealing  Directives  2001/77/EC  and 
2003/30/EC, OJ L 140 (5.6.2009, p.16). 

48   Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, 
amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 
315, 14.11.2012, p. 1). 

39 

 
 
                                                           
Notes: 

Source: 

The numbers in brackets refer to the number of bidding zones included in the piece of analysis. While 
ACER did not formally disclose the region definition, we assume that Baltic corresponds to Estonia, 
Lithuania, Latvia, Core CWE corresponds to Germany/Austria, France, Belgium and the Netherlands, 
SWE to Spain, France and Portugal, Nordic to Norway, Sweden, Finland, and Denmark. For core CEE 
ACER defined new capacity calculation regions in 2016 November, based on which Hungary is a member 
of the new Core region, which is composed of the former Central and Western European (CWE) and 
Central and Eastern European (CEE) regions, complemented by Romania and Croatia, and IU to Ireland 
and United Kingdom.  
ENTSO-E and ACER calculations (2018) 

It can be concluded from the above figure that: 

  For the Nordic zone: the share of hours of full convergence has tended to decrease since 
2012. It reached about 15% in 2017, compared with about 30% in 2012. The combined 
share of full and moderate convergence has remained stable at around 55%; 

  For  the  CWE  region:  the  share  of  hours  of  full  convergence  has  significantly  increased 
since  2013.  It  reached  about  40%  in  2017,  compared  with  less  than  20%  in  2013. 
However,  it  remains  below  the  2011  level  (more  than  60%).  Large  discrepancies  are 
observed between quarters: during the first and last quarter of 2017, relatively low price 
convergence and large price differentials were observed, mainly due to a prolonged period 
of low nuclear availability in France and, to a lesser extent, due to low nuclear availability 
in the first quarter in Belgium and Germany. Generally speaking, the price convergence 
within 
the 
to 
implementation of flow-based market coupling (FBMC) in the CWE region, in 2015. 
  For the Baltic region: The share of hours of full convergence has significantly increased 
since 2012. It reached a little more than 80% in 2017, compared with about 10% in 2012. 
This is mainly explained by the increase in the amount of cross-border capacity within the 
Baltic  region,  as  well  as  between  the  Baltic  and  neighbouring  regions,  following  the 
commissioning  of  the  LitPol  Link  (Lithuania-Poland)  and  the  NordBalt  (Lithuania-
Sweden) interconnectors on 9 and 14 December 2015, respectively. 

improved  however  between  2013  and  2017 

the  region 

thanks 

The  evolution  of  the  price  convergence  in  these  three  regions  led  to  the  conclusion  that  some 
regions as defined in 2012 ETS Guidelines do not meet the price convergence criteria anymore. 
While  the  CWE  and  Nordic  regions  need  to  include  less  countries  in  order  to  find  a  sufficient 
price convergence; the Baltic countries can now form a unique zone since they show a large price 
convergence. 

Moreover, as illustrated by Table 3below, the emission factors for the regions as defined in annex 
IV of the 2012 ETS Guidelines have generally been on a slightly downward trend over the last 
years.  The  methodology  to  calculate  the  emission  factors  are  based  on  the  so-called  “Finnish 
method”  that  uses  fixed  factors  for  efficiency  of  electricity  and  heat,  as  used  in  the  Energy 
Efficiency Directive.49 That method reflects the specificity of cogeneration (also called combined 
heat and power “CHP”).  

Table 3 Evolution of emission factors based on 2012 ETS Guidelines 

Zones 

Belgium 

Bulgaria 

Czechia 

2002 

2005 

2008 

2011 

2014 

2017 

2018 

0.55 

1.03 

0,99 

0.52 

1.05 

1.00 

0.43 

1.21 

1.04 

0,41 

0,432 

0,99 

0,93 

0,97 

0,91 

0,36 

1,00 

0,83 

0,37 

0,99 

0,83 

49   Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, 
amending  Directives  2009/125/EC  and  2010/30/EU  and  repealing  Directives  2004/8/EC  and  2006/32/EC  Text 
with EEA relevance, OJ L 315 (14.11.2012, p. 1–56). 

40 

 
 
 
                                                           
Denmark 

Germany 

Estonia 

Ireland 

Greece 

Spain 

France 

Croatia 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Hungary 

Malta 

Netherlands 

Austria 

Poland 

Portugal 

Romania 

Slovenia 

Slovakia 

Finland 

Sweden 

United Kingdom 

Norway 

0.73 

0.88 

1.39 

0.68 

1.02 

0.69 

0.76 

0.76 

0.59 

0.76 

1.52 

1.45 

0.38 

0.95 

0.94 

0.60 

0.52 

1.17 

0.61 

1.07 

1.14 

1.03 

0.66 

0.77 

0.57 

0.58 

0.54 

0.84 

1.31 

0.64 

1.03 

0.60 

0.75 

0.79 

0.47 

0.80 

1.31 

1.12 

0.39 

0.85 

0.88 

0.58 

0.51 

1.11 

0.58 

0.99 

1.12 

0.97 

0.58 

0.67 

0.57 

0.68 

0.73 

0.79 

1.27 

0.53 

0.94 

0.48 

0.75 

0.74 

0.44 

0.78 

0.89 

1.12 

0.40 

0.76 

0.88 

0.53 

0.45 

1.09 

0.51 

1.08 

1.06 

0.93 

0.58 

0.52 

0.54 

0.76 

0,55 

0,76 

1,08 

0,56 

0,84 

0,61 

0,58 

0,63 

0,52 

0,77 

0,34 

0,43 

0,37 

0,65 

0,87 

0,47 

0,49 

0,84 

0,61 

0,88 

0,91 

0,69 

0,62 

0,52 

0,61 

0,69 

0,60 

0,81 

1,14 

0,59 

0,90 

0,73 

0,67 

0,77 

0,56 

0,71 

0,35 

0,40 

0,38 

0,78 

0,73 

0,53 

0,52 

0,84 

0,80 

0,83 

0,90 

0,76 

0,62 

0,61 

0,66 

0,54 

0,61 

0,75 

1,07 

0,55 

0,72 

0,70 

0,51 

0,54 

0,49 

0,71 

0,31 

0,42 

0,42 

0,64 

0,48 

0,51 

0,42 

0,82 

0,62 

0,85 

0,77 

0,72 

0,59 

0,63 

0,44 

0,70 

0,62 

0,76 

1,07 

0,50 

0,75 

0,73 

0,51 

0,55 

0,49 

0,71 

0,33 

0,41 

0,42 

0,63 

0,40 

0,50 

0,42 

0,81 

0,63 

0,87 

0,80 

0,71 

0,60 

0,63 

0,43 

0,74 

Source: 

 Eurostat, DG ENER internal calculations based on the Finnish method 

This global decrease can be explained by several factors: 

-  The  closures  of  most  polluting  units  and  emission  reductions  driven  by  the  Large 
Combustion  Plants  Directive  (LCPD)50  and  the  Industrial  Emissions  Directive  (IED)51. 
The IED and LCPD have set EU-wide emission limits for power producers. In order to 
comply with these rules, power producers had to improve their processes in order to limit 
the emissions. For some units, the cost for refurbishment was prohibitively high and led 
to  closures.  Therefore,  the  implementation  of  these  two  directives  resulted  in  reducing 
the emissions in the EU energy mix. 

-  An increase in gas capacity and a diminution of coal/lignite capacity. Coal power station 
installed capacity has steadily declined in Europe from 190 GW in 2010 to 152 GW in 
2019. This decrease was driven by the emission directives presented above but also by 

50   Directive  2001/80/EC  of  the  European  Parliament  and  of  the  Council  of  23  October  2001  on  the  limitation  of 

emissions of certain pollutants into the air from large combustion plants, OJ L 309 (27.11.2001, p.1). 

51   Directive  2010/75/EU  of  the  European  Parliament  and  of  the  Council  of  24  November  2010  on  industrial 

emissions (integrated pollution prevention and control), OJ L 334 (17.12.2010, p.17). 

41 

 
                                                           
different  national  measures,  such  as  coal  phase  out  or  additional  carbon  taxes. Most  of 
the time, this coal capacity was replaced by a mix of renewable and gas generation. With 
gas emitting less CO2 than coal, this results in a reduction of EU emission factors.  

-  Reduction in peaking oil unit productions. As indicated by Eurostat “The production of 
electricity from fossil fuels, especially from oil products, is slowly diminishing. Many of 
the existing  oil-fired  plants  are  kept  only  as  a  part of  the  power reserve  margin,  using 
mainly fuel oil and gas/diesel oil. In 2016 the input of oil into the transformation sector 
for  electricity  generation  represented  less  than  a  quarter  of  the  quantities  used  in 
1990”.52  This  reduction  in  the  oil  generation  mainly  comes  from  additional  sources  of 
generation (gas, renewables,  etc.) and weak demand  over the last years that resulted in 
lower  demand  for  oil  generation  (oil  is  the  most  expensive  source  of  generation  in 
Europe and therefore used as a last resort in power markets). Oil generation is only used 
during peak periods and therefore has a limited impact on annual emission factors. 

-  An  increase  in  renewable  generation  that  tends  to  diminish  the  utilisation  of  thermal 
capacity, especially the peaking units that can be the most polluting. Renewable energy 
substitutes itself for more polluting fuels in the merit order (they ‘push them to the far 
right’)  and  thus  reduces  the  total  emissions.  In  the  current  method,  the  impact  of 
renewable  generation  is  not  straightforward,  as  only  thermal  generation  is  considered. 
However, it results in less generation from the most polluting thermal plants and has an 
indirect impact on the emission factor, even with the current method. 

The  recent  announcements  regarding  the  coal  phase  out  in  Europe  (United  Kingdom,  the 
Netherlands,  Finland,  France,  Germany  and  Italy)  indicate  that  more  coal  plant  closures  are 
expected. The overall impact on the fuel mix is likely to further reduce the emission factors.  

In regards to renewables, the impact is not straightforward due to the current method focusing on 
thermal  generation.  However, renewable  penetration will  increase the number  of  hours  without 
thermal  generation  being  marginal  and  will  drive  to  reconsider  a  more  suitable  method  to 
estimate the emission intensity. 

The  CO2  emission  factor  (tCO2/MWh)  in  the  compensation  formula  represents  the  share  of  an 
increase  in  carbon  prices  that  is  passed  on  through  power  prices.  A  higher  rather  than  a  lower 
factor results in a higher aid amount. If in the defined region price convergence is low, the impact 
of  CO2  costs  of  electricity  produced  in  one  Member  State  on  the  price  for  electricity  paid  by 
customers located in another Member State located in the same region would be limited, and vice 
versa. Depending on the electricity mix of the Member States involved, an incorrect delimitation 
of  the  regions  may  lead  to  overcompensation  or  under-compensation  of  some  consumers.  For 
those consumers, this may have had an impact on both the prevention of competition distortion 
and the preservation of the incentives to decarbonise. This result seems to be confirmed by the 
results of the evaluation carried out by the Netherlands at national level in 2017, which suggested 
the application of the national emission factor instead of the higher regional factor for the Central 
Western Europe (CWE) Region.  

The baseline output 

The 2012 Impact Assessment stressed that if the calculation of the compensation is based on the 
installations’  actual  production  determined  ex  post,  increasing  production  would  not  be 
financially sanctioned, in that the aid would increase with increasing indirect CO2 costs. 

In  terms  of  stakeholder  feedback,  the  Commission  received  very  few  comments  on  the 
effectiveness  of  the  baseline  output.  In  reply  to  the  public  consultation,  some  industrial 
stakeholders belonging to sectors eligible for compensation noted that historical production can, 
on  the  other  hand,  lead  to  overcompensation  when  industry  reduce  production.  To  somewhat 
mitigate  the  risk  of  windfall  profits,  the  2012  ETS  Guidelines  adjusted  the  historical  output  in 

52   https://ec.europa.eu/eurostat/statistics-explained/pdfscache/43212.pdf 

42 

 
  
                                                           
case of significant capacity increases or substantial reductions in actual production.53 However, 
this  adjustment  did  not  fully  reflect  reductions  in  production  capacity  and  could  therefore  still 
have led to some overcompensation.54  

In  addition,  in  their  reply  to  the  targeted  consultation  to  the  Member  States,  the  Netherlands 
explain  that  the  evaluation  of  the  national  scheme  in  2017  suggested  that  the  baseline  output 
could be dynamic, thereby ensuring that it reflected more recent production data. 

Renewables Power Purchase Agreements (PPAs) 

As  mentioned  in  2.1.3  above,  an  unexpected  impact  of  the  2012  ETS  Guidelines  has  been 
observed on bilateral contracts between electro-intensive users and producers of electricity from 
renewable energy sources. This comes from the fact that Recital 11 of the ETS Guidelines has 
been  interpreted  by  some  Member  States  as  an  exclusion  of  renewable  power  purchase 
agreements (“PPAs”) from indirect ETS cost compensation. 

However, this provision attracted criticism across almost all categories of stakeholders. Several 
respondents pointed out, in their contribution to the public consultation, that prices of renewable 
electricity  are  linked  to  market  prices  and  therefore  include  CO2  emission  costs,  therefore 
excluding them from compensation makes entering into a renewable PPA less attractive than into 
fossil fuel based PPAs or buying power on the wholesale market, in which cases the consumer 
can  receive  compensation.  Those  replies  came  both  from  sector  representatives  and  companies 
potentially discouraged from entering into a renewable PPA, as well as NGOs, trade unions, and 
one  research  institute.  Such  unexpected  effect  can  reduce  the  incentive  for  a  cost-effective 
decarbonisation of the economy, by making large electricity consumers reluctant to enter into a 
PPA with an electricity producer from renewable energy sources as it may not be able to receive 
indirect ETS costs compensation for the electricity purchased through such PPA.  

5.3.5.  Conclusions 

From the results of the literature review, the analysis of the case-practice, the results of the JRC 
Technical Report, the conclusions on electricity price-convergence within the EU, as well as the 
consultation activities, it can be concluded that the impact of the 2012 ETS Guidelines on the risk 
of carbon leakage is difficult to determine. In fact, while it is true that the absence of empirical 
evidence of instances where carbon leakage has occurred could in principle be an indicator that 
the  2012  ETS  Guidelines  were  successful  in  minimising  such  risk,  decisions  of  industries  to 
relocate  or  not  are  multi-factorial  and  can  hardly  be  traced-back  to  one  single  cause.  In  this 
context, some sectors which were not eligible or companies located in a Member State without 
compensation scheme in place consider that the Guidelines have not prevented carbon leakage. 
However, as already explained in paragraph 5.2.1, they have failed to provide concrete examples 
of carbon leakage due to indirect ETS costs, rather than other cost elements. Finally, the results 
presented in the JRC Technical Report suggest that the aid has not had a signiﬁcant eﬀ ect on ﬁrm 
performance, measured in terms of turnover, value of total assets and number of employees. This 

53   Annex 1 of the 2012 ETS Guidelines provides that: “If the installation did not operate for at least one year from 
2005 to 2011, then the baseline output will be defined as yearly production until there are four years of operation 
on record, and afterwards it will be the average of the preceding three years of that period. If, over the aid granting 
period, production capacity at an installation is significantly extended within the meaning of these Guidelines, the 
baseline output can be increased in proportion to that capacity extension. If an installation reduces its production 
level in a given calendar year by 50 % to 75 % compared to the baseline output, the installation will only receive 
half  of  the  aid  amount  corresponding  to  the  baseline  output.  If  an  installation  reduces  its  production  level  in  a 
given calendar year by 75 % to 90 % compared to the baseline output, the installation will only receive 25 % of 
the  aid  amount  corresponding  to  the  baseline  output.  If  an  installation  reduces  its  production  level  in  a  given 
calendar year by 90 % or more compared to the baseline output, the installation will receive no aid”. 

54   For instance, a 70% reduction in capacity would still guarantee compensation at 50% of the baseline output.  

43 

 
 
 
                                                           
finding also suggests that the compensation received did not create a strong distortive effect on 
competition within EU. 

Similarly,  the  analysis  shows  that  the impact  of the 2012  ETS  Guidelines  on  the  prevention of 
competition distortions  and  the  preservation  of the incentives to  decarbonise  is also  difficult  to 
determine. However, it is clear from the data on electricity price convergence in Europe that the 
regions on which the CO2 emission factors are based do not adequately address those risks. 

5.4.  Efficiency 

  To  what  extent  are  the  costs  associated  with  the  ETS  Guidelines  proportionate  to  the 

benefits they have generated? 

The 2015 evaluation could not conclude on the efficiency of indirect cost compensation due to 
the lack of available evidence at the time. 

The Impact Assessment of the 2012 ETS Guidelines measured the efficiency of the options in a 
qualitative  way.  It  concluded  that  the  preferred  option  involved  two  out  of  the  three  potential 
types of administrative burden: 

-  The  first  burden  affects  Member  States  and  aid  beneficiary  firms  and  concerns  the 

calculation of the production level (per installation).  

-  The second burden on Member States and aid beneficiaries concerns the monitoring of 

changes in investment capacity. 

In  addition,  the  Impact  Assessment  of  the  2012  ETS  Guidelines  also  argued  that  the  option 
minimising the trade-offs between the objectives would also be the most efficient. 

As  described  in  Implementation  /  State  of  Play  above,  some  Member  States  have  introduced 
consumption thresholds limiting the possibility to benefit from indirect ETS costs compensation 
to undertakings consuming at least a certain volume of electricity per year (usually 1 GWh). The 
reason given to justify such threshold is that below a certain volume of electricity consumption, 
the administrative costs implied for benefiting from the compensation would be higher than the 
actual  amount  of  compensation.  It  is  the  fact  both  for  the  undertakings  concerned  that  would 
spend time and money to prepare their request for compensation and for the administration of the 
national  authorities that  would  have  to  assess  more requests and  among  them  some  that  would 
lead to a limited amount of compensation.  

Among the responses to the public consultation which provided a qualitative assessment on the 
question of administrative costs (i.e. excluding those who did not reply and those who said they 
did not know), the majority agrees that the administrative costs of the implementation of the cost 
compensation are  low.  As shown in  Figure  15,  only 2%  of the  respondents say  those costs  are 
“high” or “very high”, and these can be explained by the relatively low amount of compensation 
received by those respondents. 22% of respondents think the administrative costs are “low” and 
7% think they are “very low”.  

44 

 
  
 
 
 
Figure 15: overview of replies to question 10 “how do administrative costs incurred by the aid 
application compare with the actual amount of compensation received?” 

Source: 

Analysis of public consultation responses 

In  reply  to  the  targeted  consultation,  Slovakia  referred  to  the  low  administrative  burden  for 
setting up and managing an indirect ETS costs compensation scheme.  

As regards the administrative burden concerning the reporting requirements imposed on Member 
States  under  the  ETS  Guidelines,  no  specific  comments  were  received  in  the  consultation. 
However,  the JRC  Technical  Report  highlighted  that  the  records  on  beneficiaries  submitted  by 
Member  States  to the  Commission  greatly  differ  in  format  from  one  Member  State  to  another, 
and  sometimes  the  same  Member  State  uses  different  templates  over  time.  The  absence  of  a 
standardised template available for the reporting authorities therefore created inefficiencies in the 
analysis of those data. The harmonisation of the records proved to be demanding in terms of time 
and effort. The JRC Technical Report argues that by introducing a standardised template for the 
reporting would have had a low impact on the administrative costs for the reporting authorities, 
as  all  the  information  requested  in  such  template  would  already  be  in  their  possession.  On  the 
other hand, such template would have considerably reduced the costs and administrative burden 
of analysing such data by the Commission.  

On the benefits for society generated by the ETS Guidelines, a majority of respondents did not 
provide  or  was  not  able  to  provide  an  answer.  However,  reduced  GHG  emissions  were 
considered  a  moderately  important  or  important  benefit  by  50%  of  respondents,  and  energy 
efficiency  improvements  were  also  considered  so  by  38%  of  them.  Overall,  respondents  to  the 
public consultation consider that the ETS Guidelines have  mitigated the risk of carbon leakage 
and therefore generated socio-economic benefits in the EU by preventing some electro-intensive 
companies to relocate outside the EU and thereby maintaining jobs in Europe. The majority of 
respondents claim that compensation of indirect ETS costs also has environmental benefits as it 
does  not  prevent  industries  from  pursuing  energy  efficiency  efforts.  By  preventing  industries 
from  relocating  to  areas  with  less  stringent  climate  policies,  it  also  prevents  increases  in  GHG 
emissions at global level. There was no evidence provided to quantify the benefits generated by 
indirect  ETS  costs  compensation  schemes,  including  the  sustained  energy  efficiency  savings. 
Therefore, the positive impacts of the ETS Guidelines are only qualitatively assessed.  

From the contributions received to the consultation activities, it appear that the ETS Guidelines 
have  generated  benefits  for  the  society,  in  particular  environmental  and  socio-economical  ones 
(GHG emissions reduction, energy efficiency improvements, preservation of employment within 
the EU) without imposing an important administrative burden on undertakings. 

45 

 
 
 
 
 
 
Apart  from  these  feedbacks  received  from  stakeholders  through  the  consultation  activities,  no 
other evidence was available to establish whether the costs triggered by the 2012 ETS Guidelines 
were proportionate to the generated benefits. It is therefore not possible to draw conclusions on 
the efficiency of the 2012 ETS Guidelines. However, it should be recalled that, without the ETS 
Guidelines,  the  Commission  would  have  assessed  the  measures  notified  by  Member  States  (as 
foreseen in the ETS Directive) on a case by case basis. That would have certainly added higher 
costs  for  the  administration.  In  practice,  as  some  Member  States  have  introduced  electricity 
consumption thresholds, it appears that, on a case by case basis, Member States have managed to 
reduce the administrative burden of indirect ETS costs compensation measures. 

5.5.  EU added value 

  What  is  the  additional  value  resulting  from  the  fact  that  the  Commission  has  adopted 
State  aid  Guidelines,  compared  to  what  could  have  resulted  from  a  case-by-case 
assessment of the notified national ETS compensation schemes? 

The  2015  evaluation  specified  that  the  indirect  ETS  costs  compensation  covers  all  types  of 
installations, be it covered or not by the EU ETS and has been requested by the industry during 
the  revision  of  the  ETS  Directive.  It  stated  that,  as  indirect  ETS  costs  compensation  measures 
have in any event to be approved by the Commission as they constitute State aid measures. The 
existence of ETS Guidelines reduce administrative costs but would have no impact on efficiency 
or  effectiveness  of  the  compensation  measures.  It  also  concluded  that  without  ETS  Guidelines 
setting common rules for Member States, the design of indirect ETS costs compensation schemes 
would have been different among Member States and therefore more complicated to understand 
for  market  parties.  The  level  of  support  between  Member  States  would  also  have  been  more 
difficult  to  compare.  However,  the  2015  evaluation  also  concluded  that  the  indirect  ETS  costs 
compensation schemes may have a negative impact on the level playing field in the EU. 

The  conclusions  from  the  2015  Evaluation  are  still  valid  today  with  12  Member  States  having 
implemented an indirect ETS costs compensation scheme.  

The  adoption  of  common  rules  led  to  the  implementation  of  indirect  ETS  costs  compensation 
schemes that are very similar among Member States (see section 3 above). Some variations exist, 
in  particular  regarding  the  financing  of  the  compensation  schemes  (from  the  national/regional 
budget or from the auctioning of allowances), on the level of compensation (FI only grant 40% 
aid  intensity  in  2016-2018  and  37.5%  in  2019-2020)  or  due  to  some  additional  conditions  to 
benefit from compensation (minimum level of electricity consumption of 1 GWh/year in Flanders 
and  the  Netherlands,  requirement  to  have  implemented  energy-efficiency  measures  to  benefit 
from the scheme in Flanders). It also simplifies the analysis of amount of compensation granted 
by Member States (see Table 2 above). 

During the public consultation launched in February 2019, a large majority of all categories of 
respondents55  replied  positively  to  the  question  whether  it  is  useful  to  have  ETS  Guidelines 
compared to a scenario where Member States would have been implementing indirect ETS costs 
compensation schemes without specific Guidelines from the Commission.  

Figure  16:  overview  of  replies  to  question  14  of  the  public  consultation  on  the  usefulness  of 
having ETS Guidelines in place 

55   More  specifically,  53  business  associations,  twenty-one  companies,  five  public  authorities,  two  NGOs,  and  one 
contribution from respectively one consumer organization, one trade union, one academic/ research institution and 
individual citizen sustained this view. 

46 

 
  
                                                           
Source: 

Analysis of public consultation responses 

A  large  majority  of  respondents  favour  the  existence  of  the  ETS  Guidelines,  compared  to  a 
scenario  where  no  State  aid  Guidelines  would  have  been  issued.  For  these  respondents,  ETS 
Guidelines  help  reducing  competition  distortions and creates level  playing  field within the  EU. 
They  also  reduce  administrative  costs  for  companies  and  Member  States.  Finally,  they  provide 
clarity, stability, predictability for companies across the EU with a coherent legal framework.  

However,  some  respondents  criticise  the  fact  that  the  implementation  of  an  indirect  ETS  costs 
compensation  scheme  is  not  mandatory  for  all  Member  States.  There  are  also  diverging  views 
regarding  the  need  to  leave  enough  flexibility  to  Member  States  to  implement  schemes  tailor-
made  for  their  respective  industries  and  their  specificities,  and  the  necessity  to  implement  a 
compensation system harmonised at EU level (as for direct emissions). On this point, it is to be 
noted  that  an  EU  harmonised  system  would  indeed  ensure  a  full  level  playing  field  between 
Member States, ensuring that companies across the EU benefit from the same conditions set at 
EU  level.  However,  this  is  not  the  option  that  has  been  chosen  by  the  co-legislators  when 
establishing the ETS Directive. It is therefore not possible for the Commission to unilaterally opt 
for  the  implementation  of  an  EU  harmonised  system  and  the  choice  of  issuing  ETS  State  aid 
Guidelines ensures common conditions for indirect ETS costs compensation within the EU.  

More  generally,  the  existence  of  State  aid  Guidelines  allows  Member  States  and  potential 
beneficiaries to know ex ante the rules that the Commission will use to assess the compatibility 
with  the  internal  market  of  the  aid  schemes  notified  by  Member  States.  This  guarantees 
predictability and increases the legal certainty of the system.   

Overall  the  existence  of  the  ETS  Guidelines  has  a  clear  EU  added  value  that  is  praised  by 
stakeholders  as  it  brings  similarities  in  the  design  of  Member  States  compensation  schemes, 
reduces administrative costs and provides clarity, stability and predictability.  

5.6.  Coherence 

  To what extent is the indirect CO2 cost compensation coherent with the objective of the 
for  Europe 

Industrial  Strategy 

the  New 

Green  Deal  Communication  and 
Communication? 

  To what extent is the indirect CO2 cost support coherent with other interventions which 

have similar objectives? 

5.6.1.  Coherence with the objectives of the Green Deal Communication 

and the New Industrial Strategy for Europe Communication 

The Green Deal Communication highlights that achieving a climate neutral and circular economy 
requires  the  full  mobilisation  of  industry.  Energy-intensive  industries,  such  as  steel,  chemicals 

47 

 
 
 
and cement, are indispensable to Europe’s economy, as they supply several key value chains. The 
decarbonisation  and  modernisation  of  this  sector  is  essential.  The  New  Industrial  Strategy 
Communication also mentions that reducing emissions across industry will depend on an ‘energy 
efficiency first’ principle. 

The  Green  Deal  Communication  also states  that,  as  long  as  many  international partners  do  not 
share the same ambition as the EU, there is a risk of carbon leakage, either because production is 
transferred  from  the  EU  to  other  countries  with  lower  ambition  for  emission  reduction,  or 
because  EU  products  are  replaced  by  more  carbon-intensive  imports.  If  this  risk  materialises, 
there will be no reduction in global emissions, and this will frustrate the efforts of the EU and its 
industries  to  meet  the  global  climate  objectives  of  the  Paris  Agreement.  The  New  Industrial 
Strategy Communication also stresses the importance of addressing the risk of carbon leakage.  

The 2015 Evaluation stated that the compensation of indirect ETS costs is not coherent with the 
transition to low carbon economy as it does not incentivise action on the side of the energy user. 

As explained in 5.4 above on effectiveness, the 2012 ETS Guidelines only provide for a partial 
compensation  of indirect ETS costs and therefore, in principle, contain an incentive for a cost-
effective  decarbonisation  of  the  economy.  However,  as  concluded  in  this  above  section,  it  is 
difficult to gather evidence of the impact of the 2012 ETS Guidelines on the decarbonisation of 
the EU economy. Similarly, it is also difficult to find information to conclude on the coherence of 
the 2012 ETS Guidelines on this point. Only a few Member States have introduced conditionality 
requirements  to  ensure  that  beneficiaries  of  indirect  ETS  costs  compensation  will  actively 
undertake measures to become more energy efficient. 

It appears from the results of the public consultation that the Guidelines were not perceived as 
contradictory  with  the  other  EU  policies  and  regulation  for  energy  efficiency  and  reduction  of 
GHG emissions. Most industries point to the fact that being energy efficient is already necessary 
to remain competitive and therefore receiving a compensation does not deter them from pursuing 
their efforts. More than that, they even point out that a lack of compensation would effectively 
constitute  a  barrier  to  electrification  and  decarbonisation  as  fossil  fuel-based  energies  would 
receive  compensation  while  electricity  would  not  and  therefore  electrification  would  not  be  an 
attractive solution. Little evidence is provided to demonstrate that energy efficiency savings have 
been sustained during phase 3 of the EU ETS therefore the respondents’ statements need to be 
considered cautiously.  

The  contributions  to  the  consultation  activities  therefore  nuance  the  conclusions  of  the  2015 
Evaluation as they show an overall opinion that the ETS Guidelines are coherent with the other 
ETS  regulations  and contribute to  the  objective  of reducing  GHG  emissions to combat  climate 
change.  However,  the  fact  that  some  Member  States  strengthened  the  conditionality  of  the 
compensation of indirect ETS costs shows that there is scope to improve the incentives to energy 
efficiency measures. 

In the light of the above, the compensation of indirect ETS costs seems to be coherent with the 
objective of minimising the risk of carbon leakage for energy intensive industries, as mentioned 
in the Green Deal Communication. However, the existing rules could be strengthened to increase 
the incentives for energy efficiency investments. 

5.6.2.  Coherence with other interventions 

Indirect ETS costs compensation and free allowances 

Both  the  compensation  of  indirect  ETS  costs  allowed  under  the  2012  ETS  Guidelines  and  the 
rules for allocation of free allowances set by the ETS Directive aim at lowering the costs incurred 
by the EU ETS for the European industry.  

As regards sectors eligible for indirect ETS costs compensation or for free allowances, coherence 
is ensure by the fact that, in the 2012 ETS Guidelines, the methodology used to set the eligible 
sectors  refer  to  the  factors  used  to  define  the  Carbon  Leakage  List  (see  2.1.3  above).  This 

48 

 
coherence remains even if, contrary to the granting of free allowances, the 2012 ETS Guidelines 
also allow the granting of indirect ETS costs compensation to undertakings not participating in 
the EU ETS, as these undertakings can also face higher electricity prices due to ETS costs passed 
on them by power generators.  

As  regards the amount  of compensation  received,  the  use  of electricity  consumption  efficiency 
benchmarks  in  the  calculation  formula  under  the  2012  ETS  Guidelines  ensures  the  coherence 
with the allocation of free allowances. On this point, the 2015 evaluation already concluded that 
the two set of rules were coherent and this conclusion remains valid. It is to be noted that under 
the  revised  ETS  Directive,  the  Commission  is  tasked  to  revise  the  benchmark  values  for  the 
granting of free allowances over the next trading period. In order to maintain coherence between 
free  allowances  and  indirect  ETS  costs  compensation,  such  revision  of  the  benchmark  values 
should  also  be  taken  into  consideration  for  the  calculation  of  the  indirect  ETS  costs 
compensation. 

Indirect ETS costs compensation and the EEAG 

The Guidelines on State aid for environmental protection and energy 2014-202056 (“EEAG”), in 
its section 3.7.1 (aid in the form of reductions in or exemptions from environmental taxes), set 
specific  provisions  to  assess  the  compatibility  with  the  internal  market  of  compensation  for 
higher  indirect  costs  incurred  by  a  carbon  tax  levied  on  energy  products  used  for  electricity 
production. If such carbon tax is designed in a way that supports and is directly linked to the EU 
ETS  allowance  price  by  taxing  carbon  emissions,  the  compatibility  conditions  refer  to  the 
provisions set in the 2012 ETS Guidelines (in particular for the eligible sectors, the calculation of 
the  aid  intensity  and  the  disbursement  of  the  compensation).  Coherence  is  therefore  ensured 
between the provisions of these two set of Guidelines.   

Contrary  to  the  rules  under  section  3.7.2.  of  the  EEAG  (aid  in  the  form  of  reductions  in  the 
funding of support for energy from renewable sources), the 2012 ETS Guidelines do not foresee 
the  possibility  for  Member  States  to further  limit  the  exposure  of  beneficiaries to  indirect  ETS 
cost as a function of their gross value added (“GVA”). This possibility is aimed at limiting the 
exposure  to  indirect  ETS  cost  of  certain  sectors  for  whom  these  costs,  even  after  applying  the 
75% compensation, can make up a disproportionate amount of their GVA. 

Finally, the rules under sector 3.7.2. of the EEAG also foresee a stable aid intensity, instead of a 
degressive aid intensity. 

6.  CONCLUSIONS 

This evaluation is conducted under the “back-to-back” procedure in the context of the revision of 
the 2012 ETS Guidelines that will expire on 31 December 2020. The starting point of the present 
evaluation  is  the  comprehensive  evaluation  performed  by  the  Commission  in  2015  for  the 
revision of the ETS Directive, which also covered the impact of indirect ETS costs on the carbon 
leakage risk.  

The  evaluation  assesses  the  existing  State  aid  framework  to  assess  the  compatibility  with  the 
internal  market  of  aid  to  undertakings  in  sectors  and  subsectors  deemed  to  be  exposed  to  a 
significant risk of carbon leakage due to EU ETS allowances costs passed on in electricity prices. 
To  do  so,  the  evaluation  assesses  the  effectiveness,  efficiency,  coherence,  relevance  and  EU 
added  value  of  the  rules  that  the  Commission  has  used  to  assess  the  compatibility  with  the 
internal market of aid for indirect ETS costs that 12 Member States have decided to implement in 
the period 2012-2019. 

56   OJ C 200 (28.6.2014, p.1). 

49 

 
                                                           
One of the main limitations of the evaluation stems from the fact that many factors can influence 
relocation decisions and it is therefore very difficult to find evidence of the role of indirect ETS 
costs  in  such  companies’  decisions.  It  is  even  more  difficult  to  find  evidence  of  the  role  of 
indirect ETS costs compensation in companies’ decisions not to relocate outside the EU. 

It  is  also  difficult  to  find  studies  analysing  the  recent  period  of  the  EU  ETS  (Phase  3)  during 
which indirect ETS costs compensation have been introduced. The JRC Technical Report is the 
first study analysing the impact of the ETS indirect cost compensation at firm level with an EU-
wide coverage. Due to data availability issues, that study has however some limitations. 

For these reasons, information are not always available and evidences are lacking to draw strong 
conclusions on some of the evaluation criteria. 

Overall, it can be concluded that carbon leakage risk is difficult to demonstrate empirically, even 
if  the  economic  literature  generally  conclude  that  such  risk  is  likely  to  materialise.  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.  At  this  stage,  it  is 
therefore relevant to maintain State aid rules to assess the compatibility with the internal market 
of  public  support  measures  aiming  at  addressing  the  risk  of  carbon  leakage  such  as  those 
contained in the 2012 ETS Guidelines. 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  also  relevant  to 
maintain State aid rules for indirect ETS costs compensation for the future.  

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 objective of minimising the risk of carbon leakage, very few examples of actual carbon 
leakages emerge from the consultation activities and the literature review undergone during the 
evaluation  process.  It  is  even  more  difficult  to  clearly  establish  a  causality  link  between 
relocation decisions of certain undertakings and indirect ETS costs. On the other hand, it could 
also be considered that if there is no evidence of carbon leakage due to indirect ETS costs, it is 
because indirect  ETS costs  compensation  has  been effective.  However, the results  presented  in 
the  JRC  Technical  Report  suggest  that  the  aid  has  not  had  a  signiﬁcant  eﬀ ect  on  ﬁrm 
performance, measured in terms of turnover, value of total assets and number of employees.  

Regarding  the  objective  of  preserving  the  EU  ETS  objective  to  achieve  cost-efficient 
decarbonisation  of the economy,  Eurostat  data show that  GHG  emissions have decreased  since 
1990.  However,  there  is  no  evidence  that  the  2012  ETS  Guidelines  had  an  impact  on  this 
decrease, as the EU ETS is only one of the EU initiatives to reduce GHG emissions and indirect 
ETS costs compensation is only one of the tools of the EU ETS. In addition, it is clear from the 
data  on  electricity  price  convergence  in  Europe  that  the  regions  on  which  the  CO2  emission 
factors are based are not adequate anymore. As those emission factors have also generally been 
on a slightly downward trend over the last years, they also do not allow to ensure avoidance of 
overcompensation. 

Finally, on the objective of minimising competition distortions in the internal market, it results 
from the evaluation that there is not enough evidence to establish whether this objective has been 
successfully achieved or not. However, the fact that only 12 Member States decided to implement 
an  indirect  ETS  costs  compensation  scheme  should  in  principle  have  created  intra-sectors 
distortions when undertakings from the same economic sector are located in Member States with 
different policy measures compensating indirect ETS costs. However, the findings from the JRC 
study that aid did not have a significant impact on firm performance, compared to a non-treated 
group,  points  in  the  direction  that  compensation  for  ETS  indirect  costs  did  not  generate  a 
significant distortion of competition intra-EU. 

Against those  results,  it appears  that  the  2012  ETS  Guidelines  do  not  guarantee  that the list  of 
eligible sectors, which is based on old data, and the parameters of the formula to calculate the aid 
have been effective on the prevention of carbon leakage while minimising competition distortions 

50 

 
in  the  internal  market  and  preserving  the  incentives  to  decarbonise.  On  the  other  hand,  the 
difficulty of reaching conclusions on this criterion shows the importance of a strict approach in 
terms of eligibility and proportionality when defining the State aid framework for indirect ETS 
costs compensation. 

It is also not possible to draw conclusions on the efficiency of the 2012 ETS Guidelines. Apart 
from  the  positive  feedbacks  received  from  stakeholders  through  the  consultation  activities,  no 
other evidence was available to establish whether the costs triggered by the 2012 ETS Guidelines 
were proportionate to the generated benefits. The fact that some Member States have introduced 
electricity  consumption  minimum  thresholds  for  eligibility  seems  to  be  a  way  to  reduce  the 
administrative  burden  of  the  aid  scheme.  Finally,  the  JRC  Technical  Report  suggests  that  a 
standardised template for the reporting would have had a low impact on the administrative costs 
for the reporting authorities, as all the information requested in such template would already be in 
their possession. On the other hand, such template would have considerably reduced the costs and 
administrative burden of analysing such data by the Commission. 

The  EU  added  value  of  the  2012  ETS  Guidelines  is  not  questioned  by  stakeholders.  The 
Guidelines  ensure  level  playing  field  across  the  EU  and  provides  clarity,  stability  and 
predictability. 

Finally, the 2012 ETS Guidelines seem to be coherent with the objective of minimising the risk 
of  carbon  leakage  for  energy  intensive  industries,  as  mentioned  in  the  Green  Deal 
Communication. However, the existing rules could be strengthened to increase the incentives for 
energy  efficiency  investments  and  therefore  improve  the  coherence  with  the  objective  of 
achieving further decarbonisation.  

51 

 
 
    
APPENDIX A 

Literature review on carbon leakage 

1. Evidence for carbon leakage – short-term aspects 

The 2015 evaluation reviewed two types of empirical studies including econometric analyses and 
surveys and interviews. Both types of studies did not lead to drawing conclusions about evidence 
of  carbon  leakage.  Some  progress  has  been  made  by  recent research exploring  detailed  data  of 
trade  patterns  and  at  firm-level.  This  progress,  however,  does  not  lead  to  the  provision  of 
evidence of carbon leakage.   

Several studies show that the EU ETS carbon price level does not lead to any significant impact 
on trade flows of specific sectors such as cement and steel (Boutabba and Lardic, 2017 over the 
period  of 2005-2015;  Chevallier  and  Quirion,  2017 over  the  period  of  2005-2012),  and  clinker 
and aluminium (Healy et al., 2018 over the period of 2010-2016).  

Another advance made in empirical work of carbon leakage evidence is using detailed firm-level 
data, but recent studies with such disaggregate data still cannot confirm causality between carbon 
price and carbon leakage. For example, a recent study by Ben-David et al. (2018) examines firms 
headquartered  in  multiple  countries  over  the  period  of  2008-2015.  The  study  finds  that 
multinational firms emit less overall CO2 globally in response to strict environmental policies at 
home,  although  they  tend  to  move  more  polluting  activities  abroad  in  countries  with  relatively 
weaker policies, but there is no conclusion on the evidence of carbon leakage. In a similar vein, 
Dechezleprêtre  et  al.  (2019)  track  emissions  by  geographical  region  of  more  than  1000 
multinational businesses over the period of 2007-2014 and find no evidence that the EU ETS has 
led to a displacement of carbon emissions from Europe to the rest of the world.  

Although  hard  evidence  of  carbon  leakage  has  not  been  established,  a  few  studies  show  some 
potential  negative  impacts  of  EU  ETS  on  trade,  production  and  employment.  However,  one 
should  be  careful  when  interpreting  the  findings  of  these  studies  given  the  limitation  of  the 
estimation period and of the estimated significance of the impacts. 

Two studies by Boutabba and Lardic (2017, 2017), use more recent data until the beginning of 
Phase 3, over the period of 2005-2015, with a rolling co-integration approach and find a small but 
significant impact of carbon price on net imports in cement and steel sectors as well as in primary 
aluminium  sector.  However,  as  the  estimated  impacts  of  carbon  prices  are  rather  small  –  an 
increase of $1 in carbon price leads to an increase of 0.06 million ton and 0.01 million ton of net 
import of steel and primary aluminium, respectively – the authors conclude that carbon leakage 
and  competitiveness  losses  in  these  industries  are  negligible.  It  is  worth  mentioning  that  these 
two  studies  are  among  the  very  few  that  examine  part  of  Phase  3  of  the  EU  ETS  and  provide 
empirical evidence of carbon leakage.  

According to Joltreau and Sommerfeld (2019), along with other scholars, main explanations for 
the absence of negative impacts on competitiveness found by empirical work are: 

-  Over-allocation of emissions allowances. Caused by economic crisis and grandfathering 
allocation, this overall over-allocation situation has eased compliance for all firms, thus 
explaining a non-significant impact on their competitiveness (Flues and Thomas, 2015);  

-  Persistent low carbon price. As a result of oversupply, carbon prices stayed at a low level 
until  mid-2017  and  limited  impacts  on  industry  competitiveness.  Although  prices  have 
significantly increased afterwards, the duration of high price may not yet provide enough 
data to perform robust econometric analyses;  

52 

 
 
 
 
-  Ability  of  firms  to  pass  costs  on  consumers57.  Highly  depending  on  market 
characteristics,  some  sectors  could  pass  EU  ETS  compliance  costs  onto  consumers 
without  significant  impact  on  their  market  shares,  therefore  avoiding  negative 
consequence  of  the  scheme  on  their  profitability.  A  report  published  by  EC  in  2015 
analyses pass-through of carbon costs in six European energy-intensive sectors and find 
that industry often passes through a substantial share of carbon costs; 

-  Low  share  of  energy  costs.  EU  energy  costs  represent  a  low  share  of  total  production 
costs compared to other parts of the world, and therefore, an increase of energy costs is 
less likely to have a strong impact on firms’ competitiveness;  

-  Anti-carbon  leakage  measures  such  as  free  allocation  and  other  supports  such  as  tax 
exemption may prevent carbon leakage in European industries from happening; and  

-  Carbon  pricing  induced  technological  innovation.  EU  ETS  carbon  pricing  incentivise 
firms to adopt energy-efficient technologies and to innovate, and this in turn offsets costs 
induced by the EU ETS and increases the competitiveness of regulated firms relative to 
non-regulated firms.  

So far, there is no confirmed evidence of carbon leakage related to EU ETS, according to the up 
to  date  literature  review.  Although  the  impact  of  EU  ETS  on  carbon  leakage  is  found  to  be 
insignificant,  future  persistent  high  carbon  price  may  have  larger  impacts  on  industry 
competitiveness  (Joltreau  and  Sommerfeld,  2019;  Arlinghaus,  2015).  As  noted  by  a  study 
conducted  by  the  Nordic  Council  of  Ministers  (2019),  “empirical  studies  have  not  found 
empirical evidence of significant carbon leakage, but we conclude that this cannot be used to say 
something  about  the  risk  in  the  future  …  an  increase  in  domestic  CO2  prices  can  change  this 
balance  and  spur  more  international  competition  and  cause  carbon  leakage”.  Future  research 
may offer empirical results to challenge the current finding of no evidence of carbon leakage.  

2. Evidence for carbon leakage – long-term aspects 

The  2015  Evaluation  reviewed  long-term  aspect  of  carbon  leakage  and  concluded  that 
investigated studies do not constitute conclusive evidence. Two difficulties were  highlighted in 
finding investment patterns based on historical data. The first one is that, impacts may only be 
observed after long timeframes due to long investment cycles. The second one is that, gathering 
quantitative  results  from  econometric  analyses  of  historical  developments  is  hampered  by  the 
inability to produce counterfactual scenarios. 

Recent  literature  does  not  offer  conclusive  evidence  on  carbon  leakage  through  investment 
channel. A few studies find an impact on investment only for some subsets of firms, which may 
not be representative for an industry on average.  

Recent literature studies two opposite effects on industry competitiveness:  

- 

- 

Investment  altering  effect.  Carbon  leakage  may  occur  through  altering  investment 
decisions  between  countries  with  more  and  less  stringent  carbon  regulation  in  the 
medium to long-term. However, recent studies show that it is challenging to establish a 
causal relationship between carbon prices and carbon leakage via the investment channel 
as  other  factors,  mentioned  in  the  previous  subsection,  are  usually  more  important. 
Especially, considering long investment cycles and a long period of low carbon prices, 
there is limited variation to exploit (Aldy and Pizer, 2015); and 
Investment  stimulating  effect.  In  contrast,  carbon  prices  may  stimulate  technological 
progress  and  energy  efficiency  in  countries  with  more  stringent  carbon  regulation,  for 

57   Cost pass-through is well documented in literature, see RBB (2014), EC (2016) for a literature review. 

53 

 
 
 
                                                           
example, a regulation that is more restrictive may strengthen industry competitiveness in 
the medium to long-term.  

Regarding  the  investment  altering  effect,  several  scholars  explore econometric models  to study 
the historical linkage between domestic or foreign investments and environmental regulation. For 
example,  Saussay  and  Sato  (2019)  empirically  test  this  causal  link  using  a  global  dataset  of 
Mergers and Acquisitions (M&A) deals in the manufacturing sector covering  41 countries over 
the period 1995-2014. They find a limited negative impact on the attractiveness of economies to 
foreign  industrial  investments  when firms  face  higher  energy  prices.  Another study  realised by 
Panhans  et  al. (2016), focuses  on investment  decisions  of  firm  and industry  locations,  over  the 
period  2002-2014,  as  a  function  of  energy  prices.  They  do  not  confirm  the  link  between 
environmental policy and industrial long-term investment. Verde et al. (2019) look at entries and 
exits in  European  industries. They  conclude  that the  latter  most likely  outnumbered the former 
for the period 2005–2013. These findings are broadly consistent with evidence of the literature on 
industry dynamics and cannot be confirmed to be caused by EU ETS.  

On the contrary, some studies offer empirical evidence that carbon price stimulates low-carbon 
technology  investment  and  innovation,  which  would  reinforce  industry  competitiveness  in  the 
long term. In this regard, innovation may be incentivized through the emission price signal (Calel 
and Dechezleprêtre, 2016) or by developing explicit research and development (R&D) subsidies 
in parallel (Aghion et al., 2016).  

To conclude, the long-term impact of EU ETS through investment can be distinguished between 
two  opposite  effects  –  investment  altering  and  investment  stimulating  effects.  The  lack  of 
evidence through investment channel may imply that these two effects cancel out each other. 

3. Carbon leakage rates at higher CO2 prices 

The 2015 evaluation focused on a review of ex ante modelling of carbon leakage rate with two 
types  of  models  –  Computable  General  Equilibrium  (CGE)  and  Partial  General  Equilibrium 
models – and indicated substantial differences in predictions between these two types of models. 

Recent studies have made further progress by examining existing numerical simulation or ex ante 
analyses, ranging from CGE models (being the dominant approach), sectoral partial equilibrium 
models, to analytical models, to provide model-based evidence. Simulation studies offer a range 
of  results  on  carbon  leakage  rates  and  are  sensitive  to  underlying  assumptions.  Table  4 
summarises  recent  findings  of  simulation  studies,  showing  that  carbon  leakage  rate  varies 
between negative and 63%.  

Table 4: Recent simulation studies 

Citation 

Period 
covered 

Sector 
geography 

and 

Carbon scenarios 

Findings on leakage rates 

Carbone 
and Rivers 
(2017) 

Xu et al. 
(2017) 

NA 

Worldwide 

META analysis  

10 to 30% 

2020 

Worldwide 

Multi-region 
integrated emissions 
trading scheme with 
China, U.S., Europe, 
Australia, Japan and 
South Korea, EU 
19$/tCO2 

EU GDP reduces by 0.03%, in 
contrast to countries with 
higher abatement costs such 
as US, Japan and South Korea 
(0.16%, 1.33% and 1.42%); 
integration of emissions 
trading scheme results in 
redistribution of clean energy 

54 

 
 
 
 
 
Kiuila et 
al. (2016) 

2020 

Bauer et al. 
(2015) 

2015-
2050 

Manufacturing 
and energy 
sectors, EU 
and worldwide 

US, 

EU, 
China, 
multisector 

NA 

Worldwide 

2020 

Worldwide 

Baylis et 
al. (2015) 

Gerlagh 
and Kuik 
(2014) 

NA 

Böhringer 
et al. 
(2017) 

Numerical 
simulation 

Unilateral EU policy, 
19-43€/tCO2 

in participating countries 

22% in the reference scenario, 
but can be either largely 
positive or negative 

WEO scenarios 

28% on average between 
2015-2050 

Theoretical based 
numerical simulation 

10-15% and falling to -8.5-3% 
with abatement resource 
effect 

14–17%, carbon leakage in 
the presence of technology 
spill overs can be reduced or 
even be negative 

11 to 63% depending on the 
size of the first mover 
coalition and specific model 
assumptions 

Emissions 30% 
below baseline 
levels, 15€/tCO2 

Full border carbon 
adjustment (BCA) or 
output-based 
rebating combined 
with a consumption 
tax (OBR + Tax),35-
85 €/tCO2 

Fischer et 
al. (2017) 

NA 

One domestic 
and one 
foreign region 

Subsidies to 
pollution sectors, 
numerical example  

3% with downstream 
subsidies and -15% with 
upstream subsidies 

CEEEM 
(2018) 

2050 

Global 

World and European 
dimension of CO2 
reduction efforts, 
implicit carbon price 
to achieve targeted 
emission trajectories 

EU unilateral, 14-
37$/tCO2 in 2020, 
148$/tCO2 in 2050 

25-39% 

around 28% on average 

EU, China, 
USA 

Paroussos 
et al. 
(2015) 

Arroyo-
Currás et 
al. (2015) 

2015-
2050 

2010-
2050 

EU, China and 
USA 

Scenarios around 
reduction targets, 25-
145€/tCO2 for EU 

limited to 15% of the 
emission reductions in the 
pioneering regions 

CGE models are built on theoretical frameworks and a set of inputs and assumptions. Results of 
simulated  carbon  leakage  rates  found  by  CGE  models  are  sensitive  to  the  choice  of  input 
parameters.  In  addition,  CGE  models  are  built  at  the  aggregated  level  and  therefore  often  lack 
sector granularity. It is therefore difficult for such a modelling approach to capture sector-specific 
aspects of market structure and competitive dynamics.  

For instance, a recent report by CEEEM partners (2018) investigates the extent to which carbon 
leakage  and  competitiveness  are  connected.  This  report  analyses  over  20  scenarios,  including 
scenarios  of  both  European  and  non-European  emissions’  reduction  targets  (carbon  price  and 
policy designs), to assess the impact on the competitiveness of EU’s energy intensive sectors. It 
concludes that energy intensive sectors are highly affected by higher emission cuts in the EU-28, 
mainly due to higher allowances costs. Simulated carbon leakage rates on average for 2050 range 

55 

 
 
 
between  25-39%.  Kiuila  et  al.  (2016)  define  carbon  leakage  in  a  broader  sense,  due  to  the 
complexity  of  the  global  economic  system  and  combined  with  other  factors,  as  a  function  of 
economic  development.  This  study  identifies  a  list  of  parameters  that  affect  not  only  the 
magnitude  but  also  the  sign  of  the  carbon  leakage  rate.  For  example,  simply  manipulating 
elasticities of trade substitution can lead to either a positive or a negative carbon leakage rate. 

As stated by several reports such as World bank (2015) and Vivid Economics (2015), differences 
in  modelling  scope  and  sensitivities  to  variations  of  key  assumptions,  affect  significantly  the 
results of carbon leakage rates (market structure, elasticity parameters, adjustment in the energy 
supply  side,  technology  spill  overs,  protection  of  energy  intensive  industries).  The  value  of 
carbon leakage rate itself cannot constitute evidence of carbon leakage as more simulation studies 
are evaluated ex ante and there is no clearly defined cut-off value beyond which carbon leakage 
would happen. Given the limitation of simulation studies, it is difficult to establish evidence of 
carbon leakage based on these studies, but a carbon leakage below 30% is generally considered 
by literature as low risk of carbon leakage.  

4. Carbon pricing outside the EU 

The  2015  evaluation  sourced  a  few  public  reports  and  stated  that  the  number  of  jurisdictions 
implementing  or  considering  carbon  markets  or  taxes  for  future  implementation  is  steadily 
growing as well as is growing the number of initiatives which help spread EU ETS experience 
among  policy  makers.  In  order  to  understand  the  design  of  carbon  markets,  similarities  and 
differences are compared in different jurisdictions and thus new carbon leakage risk assessment 
approaches have been suggested.  

Several countries in Asia and in America have initiated carbon trading in recent years. According 
to  a  World  Bank  report  published  in  201858,  45  national  and  25  subnational  carbon  pricing 
mechanisms or a carbon taxes were in place in 2018 as shown in Figure 17 below.  

Figure  17:  Summary  map  of  regional,  national  and  subnational  carbon  pricing  initiatives 
implemented, scheduled for implementation and under consideration as of 2018 

58   World 

Bank, 

2018. 

State 

and 

Trends 

of 

Carbon 

Pricing 

2018. 

https://openknowledge.worldbank.org/bitstream/handle/10986/29687/9781464812927.pdf?sequence=5&isAllowe
d=y 

56 

 
 
                                                           
Source:  World Bank, 2018 

While  there  is  a  difference  between  an  ETS  market  and  taxation  approach,  the  number  of 
implemented carbon pricing initiatives increased from 38 in 2015 to 50 in 2019 and achieved a 
15% coverage share of global GHG emissions.  

Although  carbon  pricing  initiatives  have  been  progressing,  the  cost  of  carbon  diverges 
significantly  across  countries,  implying  that  the  fundamental  driver  of  non-harmonised  carbon 
cost is still a relevant issue.  

Narassimhan  et  al.  (2018)  analyse  the  implementation  of  emissions  trading  systems  in  eight 
jurisdictions including the EU, Switzerland, the Regional Greenhouse Gas Initiative (RGGI) and 
California  in  the  USA,  Quebec  in  Canada,  New  Zealand,  the  Republic  of  Korea  and  pilot 
schemes  in  China  according  to  five  main  criteria  -  environmental  effectiveness,  economic 
efficiency, market management, revenue management and stakeholder engagement. The analysis 
shows  that  recent  implementation  of  ETS  in  regions  including  California,  Quebec  and  South 
Korea has learnt from experience of the EU ETS in terms of regulatory structure. 

Among other countries, the initiative of the Chinese ETS has drawn much attention due to both 
its impacts on emission reduction and its competitive pressure on trade and profits of European 
industries. While there are some similarities to EU ETS in terms of cap determination, coverage 
and calculation method of allowance allocation, trading participants etc., it differs from EU ETS 
in  several  aspects  such  as  the  allocation  method,  allowance  formats,  trading  mechanism,  etc. 
(Zhang  et  al.,  2017;  Sun  et  al.  2019).  Learning  from  EU  ETS,  Sun  et  al.  (2019)  suggested  a 
dynamic and continuous methodology for allowance allocation to prevent carbon leakage taking 
into account carbon intensity, trade intensity and additionally abatement potentials.  

57 

 
 
58 

 
 
 
 
APPENDIX 2 - FINDINGS ABOUT EU ELECTRICITY PRICES 

This appendix summarises the details about EU electricity prices, as a support to the analysis of 
factors that could explain the choice of Member States to implement schemes  compensating for 
indirect ETS costs or not (see section 5.1.1). 

Figure 18: Composition of EU electricity price 

Source: 

Report “Energy prices and costs in Europe”, European Commission. Data based on DG ENER in house 
data collection 

Figure  19  below  presents  the  same  graph  for  Member  States  that  have  implemented  a 
compensation scheme at a later stage during phase 3 of the EU ETS. This graph show an opposite 
trend compared to the one presented above. Compensation schemes were generally implemented 
after  a  period  of  decrease  in  power  prices  or  after  a  phase  of  stagnation  (e.g.  Finland, 
Luxembourg  and  Slovakia).  In  this  category,  the  exception  is  France  that  implemented  the 
compensation after an increase in electricity prices. 

Figure  19:  Electricity  prices  including  all  taxes  and  levies  for  Member  States  that  have 
implemented a compensation at a later stage during phase 3 - €/KWh 

59 

 
 
 
 
Notes: 

Source: 

Large electricity industrial consumers: 20,000–70,000 MWh per year.  
Data not available for Lithuania before 2014 and not available for Luxembourg in 2018. 
Eurostat, data code nrg_pc_205 

Figure  20  below  shows  the  evolution  of  the  average  electricity  prices  for  Member  States  that 
have  not  implemented  a  compensation  scheme.  Electricity  prices  in  these  Member  States 
decreased over the period as in the rest of Europe. This decrease in electricity prices could have 
been  a  driver  for  non-implementation  of  mechanisms,  however  some  Member  States  presented 
above have decided to implement their support schemes exactly during this period. 

Figure 20: Average electricity prices including all taxes and levies for Member States that have 
not implemented a compensation schemes - €/KWh 

Notes: 

Source: 

Large  electricity  industrial  consumers:  20,000–70,000  MWh  per  year,  European  Union  category  is 
calculated as the average of EU members ratios (when data available). 
Eurostat, data code nrg_pc_205 

Figure 21 below presents these evolutions over the periods 2008-2013 and 2013-2017. 

Figure 21 and 21b: Comparison of producer price index and electricity price (including all taxes 
and levies) changes - 2009-2013 (on top) and 2013-2017 (below) 

60 

 
 
 
 
 
 
 
Notes: 

Source: 

Large electricity industrial consumers: 20,000–70,000 MWh per year.  
* means that the electricity price index change data of the country was not available.  
** means that the producer price index change data of the country was not available.  
For the figure 6a, Portuguese electricity price index change reaches 56.38% and Estonian 77.54%.   
Eurostat, data code nrg_pc_205 and sts_inpp_a 

Figure 21 shows that power prices increased over the period 2009-2012 in most Member States. 
This increase occurred at the same time as an increase in the output price of industry. One could 
have expected to see a compensation implemented in Member States for which the output prices 
had  not  increased  relatively  to  electricity  prices,  but  historical  data  do  not  confirm  this 
assumption.  Indeed,  the  two  Member  States  with  an  increase  in  electricity  prices  but  with  a 
decrease  in  producer  index  over  the  period  2009-2012  are  Malta  and  Sweden  and  they  do  not 
have a compensation scheme in place.  

As  mentioned  above,  most  Member  States  have  seen  a  decrease  in  electricity  prices  over  the 
period 2013-2017. That decrease was translated into a reduction in the production price index in 
most Member States as seen on the second graph in Figure 21b. 

61 

 
 
 
 
 
Here again, the information is mixed, and this analysis cannot provide the entire picture regarding 
the  reasons  behind  the  implementation  of  a  compensation  scheme  related  to  indirect  costs  in 
some Member States. 

The graph in Figure 22 below shows the amounts spent each year by some Member States on this 
kind of mechanism.  

Figure 22: Financial support to interruptible load schemes in some EU Member States 

Source: 

Report “Energy prices and costs in Europe”, European Commission  

The graph in Figure 23 below represents the composition of taxes and levies for small (IB) and 
large (IF) industrial electricity prices. Figure 23 shows that large industrial consumers pay around 
half the taxes paid by small industrial consumers. This spread has widen over the last years. 

Figure  23:  Composition  of  taxes  and  levies  on  prices  for  small  (IB)  and  large  (IF)  industrial 
consumers (2008-2017) 

62 

 
 
 
 
Notes: 

Source: 

Band  IB  corresponds  to  a  consumption  of  20–499  MWh  per  year  and  Band  IF  corresponds  to  70,000-
150,000 MWh per year 
Report “Energy prices and costs in Europe”, European Commission. Data based on DG ENER in house 
data collection  

As  seen  on  the  graphic  in  Figure  24  below,  the  current  levels  of  industry  GVA  as  a  share  of 
national GDP does not provide clear conclusions on the decisions regarding the implementation 
of  compensation  mechanisms.  Member  States  with  important  share  of  their  GDP  coming  from 
industry  for  the  year  2016  (e.g.  Czechia  and  Ireland)  do  not  have  existing  compensation 
mechanisms.  

When looking at the evolution of this ratio over time, the picture is also mixed. For all Member 
States with an existing compensation scheme, the ratio has decreased or remained stable between 
2008 and 2016 (except for Lithuania and Slovakia). However, this evolution might be linked to 
the 2008 crisis and the evolution between 2012 and 2016 provide a different picture. Indeed, the 
picture is  mixed  over  this period  with  Member  States  showing  an  increase in  the  ratio  such  as 
France,  Lithuania  or  Slovakia  while  other  Member  States  facing  a  decrease  such  as the  United 
Kingdom, the Netherlands and Norway.  

Then, it cannot be concluded that this indicator is relevant to determine the reasons behind the 
implementation  of  a  compensation  scheme  as  the  picture  is  also  mixed  for  Member  States 
without compensation on the graph below. 

Figure 24: Industry GVA as a percentage of GDP 

63 

 
 
 Notes: 
Source: 

European Union category is calculated as the average of EU members ratios (when data available) 
Eurostat, source code nama_10_gdp and sbs_na_ind_r2 

Figure  25  below  shows  the  penetration  of  exchanges  occurring  in  Europe  over  the  total 
exchanges performed by each EU Member State. A 100% ratio means that the Member State has 
only EU business partners.  

This graph shows that the large majority of Member States with existing compensation schemes 
have an important percentage of their trade occurring  with countries outside Europe. The main 
exceptions are Luxembourg, Slovakia and Belgium. The next section will show that the decision 
of  implementing  a  compensation  scheme  can  also  be  due  to  EU  trade  partners  with  existing 
compensation schemes. 

However, the picture is also mixed because some  Member States with important share of trade 
being done with countries outside Europe have not implemented a compensation scheme, such as 
Italy and Ireland. 

Figure 25: Percentage of exchanges with the rest of the EU for industrial goods - year 2016 

Notes: 

Source: 

The ratio is calculated as import + export value within EU divided by import + export in total. European 
Union contains 27 countries (Malta is not included) 
Eurostat, source code ext_tec03 

64