With this project, the Ecologic Institute supports the German Emissions Trading Authority (DEHSt) at the Federal Environment Agency and the Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety with the further development of the emission trading scheme of the European Union (EU ETS), for the period after 2020. The project focuses especially on the design of the carbon leakage guidelines within the fourth trading period (2020–2030) and beyond. It is the goal of the project to shed new light on the carbon leakage discussion, to assess the validity of current assumptions and to discuss potential design options.

The term "carbon leakage" describes the phenomena according to which climate policies hamper the competitiveness of domestic companies and that these companies tend to avoid this burden by relocating their production facilities to other countries. How relevant this phenomena is empirically remains contested. Apart from this, the political discussion about carbon leakage remains highly relevant for the further development of the EU ETS – especially with regard to the regulations for the industrial sector.

Work package 1 defines the tern "carbon leakage" and describes the factors that have an impact on carbon leakage. More specifically, this part of the project provides a definition and a literature based discussion of the concept carbon leakage and its different aspects; an analysis of current trends and developments with regard to foreign investments as well as an overview on large-scale investment decisions as a context for potential investment leakage; and a discussion on the design of the EU Innovation Fund as a potential complementary instrument for emission trading. At the center of the discussion rests the question whether and how the Innovation Fund could use revenues from the sale of European emission allowances to support disruptive innovations for low-carbon technologies.

Work package 2 analyses the discrepancy between the EU climate policy and its major trading partners. The first part of the analysis analyses eight sectors of the economy and assesses which countries the main trading partners of the EU are, the climate policies that cover the sectors in these countries, and the how ambitious these climate policies are compared to the EU ETS. The analysis includes polices that have been implemented and policies which are have been announced or being implemented. The second part of the analysis uses the PACE model to develop scenarios that provide information on how the leakage risk in selected sectors may develop when the trading partners of the EU use different kinds of climate policies. This part also analyses the effect that differences in the level of ambition could have on the relocation of emissions, production, and trade flows.

Work package 3 focuses on the indirect cost of CO₂ under the EU-ETS and compensation schemes in the EU member states. In a first step, the existing compensation schemes for indirect CO₂ cost are reviewed. In a second step, factors and assumptions on compensation schemes are analyzed, including the question on the portion of CO₂ cost within electricity prices for industry. In a third step, the actual compensations for indirect costs of CO₂ are analyzed. In addition, ex-ante analyses of compensation of electricity prices on the basis of the general equilibrium model PACE are conducted. The last part of this WP elaborates concrete proposals for compensation of indirect cost related to CO2 in the fourth trading period of the EU-ETS.

The Ecologic Institute heads the project in collaboration with the Centre for European Economic Research (ZEW). The Ecologic Institute is responsible for WP 1 and WP 2. The ZEW is leading the WP 3 on indirect carbon leakage.