EU urged to prepare to tackle "carbon leakage"

The EU must develop a comprehensive set of policies in readiness to tackle carbon leakage, the loss of business to companies in regions unconstrained by emissions trading schemes or carbon taxes, according to the International Energy Agency (IEA).

The report claims that while the first phase of the emissions trading scheme neither hampered the competitiveness of European firms nor prompted any to relocate, that could change, as the EU begins to impose tighter emission caps – a move that will require polluting firms to buy in more carbon credits.

"Experience to date with the EU ETS does not reveal leakage for the sectors concerned," says the report. "However, past observation of carbon leakage does not mean that there will not be in the future as countries move towards more ambitious mitigation commitments."

It warned that carbon intensive industries such as steel, cement, aluminium and iron were at particular risk of carbon leakage, adding that as fewer allowances are allocated for free, more auctioned energy intensive firms operating within the EU are likely to see operating costs rise and profits fall.

The IEA advised that the EU must prepare a series of tailored policies for each sector to prevent the phenomenon from taking place and be prepared to deploy them quickly.

It argued that ideally a global deal will be brokered at the UN's climate change talks next year in Copenhagen, that will ensure that all regions develop similar carbon legislation that ensures an even playing field for carbon intensive firms operating in different regions.

However, it warns that if an agreement is not reached then the EU must be ready to implement other policy measures, including a greater degree of free allowance allocation for energy intensive firms, financial compensation for companies facing rising costs associated with the ETS, carbon tariffs on products imported into the EU from regions without carbon taxation, and funding to also help heavy industries in developing countries lower their emissions.