Industries that might leave the EU and hence escape its CO2 emission trading rules, could get up to 100% of their CO2 emission allowances for free, to encourage them to stay. A list of industry sectors and sub-sectors to be eligible for free allowances under the revised Emission Trading System (ETS) from 2013 was backed by the Environment Committee on Wednesday, in a bid to prevent relocation-driven "carbon leakage".

The revised EU Emission Trading System (ETS), part of the EU Climate Change Package agreed by Parliament in December 2008 required the Commission to draw up by 31 December 2009 a list of the sectors and sub-sectors at significant risk of "carbon leakage" - that is the relocation of production to third countries with a less strict climate policy, leading to increased CO2 emissions by these countries.

Until an international agreement is concluded, these sectors might receive up to 100% of their allowances free until 2020 under certain conditions. Sectors or sub-sectors not on this list will need to buy part of their allowances in auctions (they will receive 80% for free in 2013, decreasing to 30% in 2020 and 0% in 2027).

As required by the revised ETS Directive, the Commission proposed a list of 164 sectors and subsectors, eg plastics, chemicals, food processing and steel industries, on 18 September. The the so-called "Regulatory procedure with scrutiny", enables Parliament to oppose the measure, provided it does so by December 23, 2009 at the latest.

Background: revised ETS directive and carbon leakage

The Directive on the revision of the EU Emission Trading System (ETS) is a key tool for achieving the EU's aim of reducing its greenhouse gas emissions by at least 20% by 2020 from 1990 levels, or by 30% in the event of an international agreement.

The EU ETS is a "cap and trade" system: it caps the overall level of emissions allowed but, within that limit, allows participants buy and sell allowances as they require, so as to cut emission costs effectively. In the first and second trading periods (2005 -2012) the great majority of allowances were allocated free of charge to installations. The revised directive has established auctioning from 2013 in principle but it includes several exceptions.

For the manufacturing sector, auctioning should be phased in gradually - in 2013 it is to receive a free allocation of 80% of allowances, decreasing to 30% by 2020 and leading to full auctioning in 2027. But a broad exception is inserted for sectors at serious risk of "carbon leakage" - that is the relocation of production to third countries with a less strict climate policy, leading to increased CO2 emissions by these countries. Until an international agreement is concluded, these sectors might receive up to 100% of their allowances free until 2020 under certain conditions The criteria for defining these sectors and sub-sectors are laid down in the revised ETS directive which states that sectors "exposed to carbon leakage" will be determined by the Commission by 31.12.2009 at the latest and every 5 years thereafter.