Energy-intensive industries such as steel and cement makers in Germany will be compensated for higher electricity costs due to the EU Emissions Trading Scheme (ETS), following a decision by the European Commission yesterday.

The decision paves the way for similar one on state aid proposed by the Treasury for costs generated by Contracts for Difference under Electricity Market Reform proposals.

Heavy energy users have been lobbying furiously for such support in order to prevent what is called 'carbon leakage', or the transfer of the same industrial activities to less regulated parts of the world as a result of the higher costs of operating in Europe due to the ETS.

A statement from the European Commission said: "The Commission's investigation found that the scheme... would effectively prevent carbon leakage while keeping competition distortions to a minimum".

A proposal for a separate €40 million compensation scheme for non-ferrous metal producers in Germany, which that nation introduced unilaterally in 2009, was rejected by the EU executive.

It argued that the German government had not provided sufficient evidence to support a case that carbon leakage had occurred and that "would favour very selectively only eleven German beneficiaries to the detriment of competitors in the internal market".

The approved scheme is back-dateable to January 2013 and also relates to support offered in Germany.

The Commission's investigation found that the scheme, "in applying the harmonised methodology of the ETS guidelines, would effectively prevent carbon leakage while keeping competition distortions to a minimum".

In May 2012, the Commission adopted guidelines on how Member States can support industry in the context of the Emissions Trading Scheme (ETS).

British proposals for a similar scheme to exempt energy-intensive industries from the costs of Contracts for Difference (CfD) are contained in an amendment to the EMR bill, currently out for consultation.

Under this Government-regulated scheme, energy suppliers would not add the costs of CfDs to the charges made for the supply of electricity to high energy users, and has been constructed using five principles. It would:

  • be targeted at companies that are both electricity intensive and trade intensive
  • minimise distortions within the UK economy;
  • avoid perverse incentives, e.g. discouraging take-up of energy efficiency measures;
  • minimise the administrative burden for all parties;
  • minimise the costs to consumers outside of the scope of the exemption (both business and household) whilst meeting the policy objective.

The Government has already set out the eligibility for compensation from the indirect costs of the EU Emissions Trading Scheme (EU ETS), based on European Commission guidelines.

It is also lobbying Brussels for urgent structural reform of the ETS, arguing that the best way to address carbon leakage would be an ambitious international climate agreement. This would create a level playing field for industry inside and outside the EU.

However, the Government meanwhile supports the allocation of free allowances under the ETS, in the absence of a global climate agreement, as it "gives relief to sectors at significant risk of direct carbon leakage, without raising barriers to international trade".

Story: David Thorpe, News Editor