How should Carbon leakage be prevented in the EU ETS?

Carbon leakage occurs when globally exposed industries face increased costs, for instance due to stricter climatic policies, while other industries on the global market are not. Although the intention of stricter climate requirements is good, they risk having the opposite effect, as emissions are moved from one country to another. Since the consequences of emissions are the same regardless of where they are caused, the total amount of emissions will remain unchanged, or increase due to transportation or less ambitious climate policies in the new country. In the European Union Emission Trading System (EU ETS), carbon leakage is a present issue, thus there are methods to identify and compensate industries at risk. The main approach of compensation has been to allocate allowances for free. However, the first two trading periods have resulted in a large surplus of allowances, which have caused low prices on carbon emissions. Since the system is now becoming more ambitious, an accurate analysis on carbon leakage is essential. Therefore, the aim of this study is to analyze in what ways these methods can be improved to enable the system to become more ambitious, without risking leakage. The result shows that the procedures used are not specific enough. Numerous reports and studies presented in my study, show that some industries are over compensated, whereas others are under compensated. Today, carbon intensity is one of the main measurements used to identify industries at risk. However, the EU must pay closer attention to the industries that have invested in renewable energy sources (as a result of the EU ETS incentive structure) and consequently have significantly lower carbon dioxide content in their emissions. These industries are also at risk of leakage due to increased total expense. In conclusion, this study shows that the methods used to identify industries at risk can be improved to prevent leakage. When altering them, not only will the analysis be more accurate, but it will also render a more precise allocation of allowances for free for those at true risk