Change Partnership’s response to the European Commission’s consultation on carbon leakage provisions post 2020 can be viewed here. This is the most controversial area of EU climate policy. The myth of ‘carbon leakage’ is the main reason why the wrong climate targets are set and perversely and why companies are subsidised for their pollution rather than having to pay for it.

There are three things to note:

i) there is no evidence of ‘leakage’ having taken place in the period 2005-2012 according to a comprehensive review ordered by the Commission. Infamously, ThyssenKrupp opened up steel making plants in Texas and Brazil to supply the EU market but these were the most disastrous investments in the company’s history leading to the dismissal of three board members and nearly 40% of the value of shares being wiped out. This indicates the problems of relocating to supply the EU market.

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ii) the legal definition of ‘leakage’ is flawed. For example, a special definition of any sector with more than 30% trade intensity was created solely to allow the cement sector to qualify for subsidies to pollute, make profits and also support further market concentration as witnessed in current merger discussions between Lafarge and Holcim. The criteria fails to take into account market structure, levels of concentration and importantly geographical location. Geography is important because it is a crucial determinant of whether a competitor is able to supply customer needs. For many sectors that are not near a border, they are largely shielded from competition unless, on the rare occasion, they have a competitor within the same location.

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iii) Convincing policy-makers that allowances should be given for ‘free’ is the biggest con in the history of humanity. ETS allowances represent 1 tonne of GHG emission. In giving them to polluters without making them pay for it is a subsidy borne by the poor souls who lose their lives and livelihoods to climate change impacts. The cost for this is huge. Therefore, the regime must be reclassified as a subsidy scheme not ‘free allocation’. It makes it worse when many of the companies that get these allowances are not exposed to international competitiveness pressures. It worse when some of the loudest screamers are also found guilty of robbing European citizens through intricate cartels as is the case with ThyssenKrupp, the German steel maker which was fined €103 in 2012 in a German cartel used to keep the price of railways artificially high (Economist subscription required).