The existing EU ETS Directive states that the indicator for the risk of carbon leakage is assessed by “the extent to which it is possible for the sector or subsector concerned, at the relevant level of disaggregation, to pass on the direct cost of the required allowances and the indirect costs from higher electricity prices resulting from the implementation of this Directive into product prices without  significant loss of market share to less carbon efficient installations outside the Community”.1

The issue of cost pass-through is thus a critical component of a proper understanding of exposure to the risk of carbon leakage, although it is at best an imperfect indicator. Bearing this in mind, the European Commission (“EC”) released in July 2015 an Impact Assessment, which draws on existing literature, to assess the ability of several sectors to pass through costs, in the context of its Proposal to amend the EU ETS Directive to enhance cost-effective emission reductions and low carbon investments. The EC also commissioned a study by CE Delft / Oeko Institut, which was released in November 2015 and assesses the ability of several sectors to pass through costs.

In this context, EUROFER has asked NERA Economic Consulting to investigate, for the European steel industry, what conclusions can be drawn from the existing literature and the latest study commissioned by the EC, and how this relates to the conclusions of the EC in its Impact Assessment.