The EU ETS Rules on Carbon Leakage and Energy Intensive Industry in the Federal Republic of Germany

Abstract

The European Union’s unilateral action on climate change has the potential to expose its energy intensive industries to undue competition from economies where lower standards of climate policies are in operation. This “green paradox” may result in carbon constrained energy intensive industries relocating their operations away from the EU as a result of international competition and increased costs in domestic production, giving rise to “carbon leakage”. For the Federal Republic of Germany, with its export driven economy dominated by energy intensive manufacturing industries, the prospect of carbon leakage is of particular interest. This article investigates the policy considerations underpinning the carbon leakage debate and the measures designed to address leakage risks, in particular sectoral approaches and free allocation of emission allowances. The concept of positive carbon leakage will be developed with the article arguing that the energy intensive industry in Germany is capable of adapting to carbon leakage by use of innovation and increased energy efficiency. The article concludes that the risk of carbon leakage in Germany is of a minimal nature and therefore considerably overstated. In order to minimise the risk of leakage further, sectoral approaches should be considered for the EU’s most energy intensive industries.