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On behalf of VLAIO, we conducted research on the Flemish scheme for compensation of indirect emission costs (CIE). Through this scheme, energy-intensive companies can receive financial compensation for higher electricity costs that indirectly result from the European Emissions Trading System (EU ETS). This form of indirect CO2 cost compensation is permitted within the European state aid frameworks and aims to limit the risk of carbon leakage: the shifting of production and investments to regions with less stringent climate regulations.
We investigated how Flanders compares to other European member states utilising this compensation possibility. To achieve this, we combined document analysis, interviews, an international comparison, and budgetary simulations. We examined how different compensation systems are structured, what is known about their effects, and the budgetary implications alternative policy choices may have for Flanders.
The international comparison reveals that European countries operating within the same state aid frameworks make diverse choices. There are variations in the amount of compensation, the emission factors used, the conditions for companies, and the obligations related to sustainability. Furthermore, countries make different trade-offs between feasibility, targeted support, and budgetary manageability.
At the same time, we find little unambiguous empirical evidence that compensating for indirect emission costs prevents carbon leakage. Many companies, however, view the scheme as a relevant factor for their international competitive position and investment climate. Nonetheless, the available literature offers limited insight into the actual effects on investment and location decisions.
The report provides an overview of the choices European countries make in shaping their compensation schemes, the available knowledge on their effects, and the implications of alternative policy options for Flanders.
