Briefing on the necessity and effectiveness of carbon leakage measures
A majority of countries in the world have proposed policies which should lead them towards net zero goals. Differences in policies targeting the CO2 emissions on national and regional levels impact market dynamics, especially related to carbon intensive sectors. The European Union considers such differences to be a factor leading to a transfer of businesses with high CO2 emissions outside the EU, therefore causing “carbon leakage.”
The existence of carbon leakage is disputed and limited, but the threat of it is widely used to push for relief from environmental policies. In some sectors, such as power production, the relocation to countries around the EU with more lenient regulation is already happening. To prevent the threat of carbon leakage and maintain the support of industry, two basic mechanisms were established in the EU – free allocation and Carbon Border Adjustment Mechanism (CBAM).
Seventeen years after implementation of free allocation that was supposed to temporarily provide some companies with free emission permits, 95 % of the industrial emissions in the EU are still covered by free allocation. This causes various problems and directly contradicts net zero goals. In about 10 years, this system should be replaced by the CBAM – system of taxes for imported products and materials to the EU. Even though the CBAM has its own drawbacks, it will bring improvement to the free allocation, and it should limit the threat of carbon leakage.
Contemporary developments on the international field, especially the war in Ukraine, are significantly changing the possibility of carbon leakage as the future of trade with both Russia and Ukraine is unknown. This puts additional pressure on the system designed to prevent carbon leakage. Adopted measures must prove to be sufficiently flexible to motivate companies to reduce its emissions while preventing carbon leakage in the changing environment.