Differentiation and Dynamics of Competitiveness Impacts from the EU ETS

We summarise the main factors that differentiate impacts of the EU ETS on profitability and market share. By examining and sampling a range of sectors, we present some simple metrics and indicators to help judge the nature of potential impacts. We also consider briefly the mitigation response to these impacts by sectors, and how they may evolve over time. The broad conclusion confirms the aggregate findings presented in the existing literature - more participating sectors are likely to profit under the current ETS structure out to 2012 at the cost of a modest loss of market share, but this may not hold for individual companies and regions. The period 2008-12 can assist technology investments and diversification, providing the continuation and basic principles of the EU ETS post-2012 is quickly defined and incentives are in place for sectors to pursue this

The European Carbon Market in Action: Lessons from the First Trading Period Interim Report

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).The European Union Emissions Trading Scheme (EU ETS) is the largest greenhouse gas market ever established. The European Union is leading the world's first effort to mobilize market forces to tackle climate change. A precise analysis of the EU ETS's performance is essential to its success, as well as to that of future trading programs. The research program "The European Carbon Market in Action: Lessons from the First Trading Period," aims to provide such an analysis. It was launched at the end of 2006 by an international team led by Frank Convery, Christian De Perthuis and Denny Ellerman. This interim report presents the researchers' findings to date. It was prepared after the research program's second workshop, held in Washington DC in January 2008. The first workshop was held in Paris in April 2007. Two additional workshops will be held in Prague in June 2008 and in Paris in September 2008. The researchers' complete analysis will be published at the beginning of 2009.The research program “The European Carbon Market in Action: Lessons from the First Trading Period” has been made possible thanks to the support of: Doris Duke Charitable Foundation, BlueNext, EDF, Euronext, Orbeo, Suez, Total, Veolia

Differentiation and dynamics of competitiveness impacts from the EU ETS

We summarises the main factors that differentiate impacts of the EU ETS on profitability and market share. By examining sampling a range of sectors, we present some simple metrics and indicators to help judge the nature of potential impacts. We also consider briefly the mitigation response to these impacts by sectors, and how they may evolve over time. The broad conclusion confirms the aggregate findings presented in the existing literature - most participating sectors are likely to profit under the current ETS structure out to 2012 at the cost of a modest loss of market share, but this may not hold for individual companies and regions. The period 2008-12 can assist participating sectors to build experience and financial reserves for longer term technology investments and diversification, providing the continuation and basic principles of the EU ETS post-2012 is quickly defined and incentives are in place for sectors to pursue this.Emissions trading, industrial competitiveness, spillovers, allowance allocation, perverse incentives.

A European carbon border tax: much pain, little gain. Bruegel Policy Contribution Issue n˚5 | March 2020

The European Green Deal has set a target of reducing European Union carbon emissions by about 40 percent over the next ten years. Reaching this target is likely to involve a significant increase in carbon prices. Theoretically, higher carbon prices can lead to carbon leakage, or the relocation of industrial activity and its accompanying emissions out of economies with high carbon prices and into economies with low carbon prices. To address this perceived threat, the European Commission will consider the inclusion of a carbon border adjustment mechanism within the European Green Deal. This will apply a charge on goods imported into the EU, based on the emissions emitted during their production. The European Commission should not make the implementation of a carbon border adjustment mechanism into a must-have element of its climate policy. There is little in the way of strong empirical evidence that would justify a carbon-adjustment measure. Assessments of current carbon pricing schemes typically find no leakage, while ex-ante modelling tends to find limited leakage, with results highly sensitive to underlying assumptions. Energy price differentials – a proxy for carbon prices – do not necessarily result in a relocation of energy-intensive production. Furthermore, significant logistical, legal and political challenges will arise during the design of a carbon border mechanism. Choices would have to be made between more efficient but highly complex and politically risky approaches, and mainly symbolic but more easily implementable solutions. To simplify the design of a carbon border mechanism whilst maximising its benefits, the Commission has proposed focusing only on carbon-intensive and trade-exposed sectors. But it will be difficult to draw a strict line between covered and non-covered sectors. Trade deviation will potentially lead to lobbying and the temptation for ‘cascading protectionism,’ with tariffs extended to industries further along value chains. A strategy of tying future climate policy to the implementation of a border adjustment mechanism might therefore hinder rather than help EU climate policy. The EU should instead focus upon the implementation of measures to trigger the development of a competitive low-carbon industry in Europe

Border Carbon Adjustments and the Potential for Protectionism

Balancing legitimate fears that carbon leakage could undermine the impact of any global climate change agreement are countervailing fears that leakage will be the excuse for protectionism in the guise of “Border Carbon Adjustments”. This would have dangers for the world trading system, risking disputes due to ambiguities in the details of WTO rules over what types of border measures are potentially and actually admissible. Even with good quality data, there is considerable potential for judgemental discretion, and hence opportunistic manipulation, in estimating the carbon charges to levy on an imported product. This is even with agreement on whether to use importer or exporter coefficients. A clear distinction needs to be made between environmental and competitiveness motives for border adjustments. The key argument is that the traditional symmetry between origin based taxes (production) and other charges and those based on the destination (consumption) principle breaks down in the case of carbon charges. This paper explores the potential for regional agreements to ensure origin as the basis for carbon levies in the aftermath of the Copenhagen Accord, while recognising the challenges that this poses for the mutual recognition of emissions regimes in particular.Competitiveness, carbon leakage, cap-and-trade (C&T), trade policy, WTO and regionalism.

Imposing a unilateral carbon constraint on European energy-intensive industries and its impact on their international competitiveness - data & analysis

This paper investigates the implications of EU climate change policy for energy intensive industries. Specifically, it calculates, for a range of energy-intensive processes and products, the product price increases that would be required to maintain unit profits at present levels, based on likely values of allowance prices in the European Union Emissions Trading Scheme up to 2020. For most of the energy- and carbon-intensive products considered here, an allowance price of €20 per tonne of carbon dioxide would require price increases of between 0.1 to 5% to maintain profits, assuming full pass-through of the allowance price along the value chain. Doubling the allowance price to €40/tonne would double the required increase. The activities that risk being most challenged by the carbon constraint appear to be container glass production using virgin inputs, primary aluminium production, primary steel production based on the basic oxygen furnace process, and some basic chemicals production. However, the analysis has also shown that for many of these cases alternative production processes exist, based on recycled inputs, for example. The cement sector, although very energy- and carbon-intensive, is relatively little exposed to international competition. Indeed, the paper also investigates in how far it would be possible for the affected activities to pass through cost increases to their clients, by analysing their exposure to domestic and international competition. It concludes that the sectors analysed are typically relatively highly concentrated (sometimes even at the world level) and form parts of vertically integrated and locally-clustered value chains. This tends to increase market entry and exit barriers and, thus, to reduce the risk of large output losses and delocalisation.climate change, competitiveness, energy-intensive industries, emissions trading

Imposing a unilateral carbon constraint on European energy-intensive industries and its impact on their international competitiveness - data & analysis

We examine the implications of EU climate policy for energy intensive industries by calculating, for a range of energy-intensive processes and products, the product price increases that would be required to maintain unit profits at present levels, based on likely values of allowance prices in the European Union Emissions Trading Scheme up to 2020. We also investigate in how far it would be possible for the affected activities to pass through cost increases to their clients, by analysing their exposure to domestic and international competition. It concludes that the sectors analysed are typically relatively highly concentrated (sometimes even at the world level) and form parts of vertically integrated and locally-clustered value chains. This tends to increase market entry and exit barriers and, thus, to reduce the risk of large output losses and delocalisation.climate change, competitiveness, energy-intensive industries, emissions trading, bergmann, schmitz, hayden, gerday, kosonen

Testing Global Sectoral Industry Approaches to Address Climate Change: Interim report of a CEPS Task Force. CEPS Task Force Reports, 4 December 2007

Successful global sectoral industry approaches could become an effective means of broadening the range of contributions by all parties to greenhouse gas reductions, and of addressing competitiveness concerns in trade-exposed industries. This report puts these two hypotheses to the test and identifies the key requirements for global sectoral industry approaches to work. The analysis is based on ongoing work within a CEPS multi-stakeholder Task Force on “Sectoral industry approaches to address climate change”, supported by the Cement Sustainability Initiative (CSI) of the World Business Council for Sustainable Development. The Final Report will be published in spring 2008

Climate change meets trade in promoting green growth: potential conflicts and synergies

To date, border adjustment measures in the form of emissions allowance requirements (EAR) under the U.S. proposed cap-and-trade regime are the most concrete unilateral trade measure put forward on the table to level the carbon playing field. If improperly implemented, such measures could disturb the world trade order and trigger trade war. Because of these potentially far-reaching impacts, this paper focuses on this type of unilateral border adjustment that requires importers to acquire and surrender emissions allowances corresponding to the embedded carbon contents in their goods from countries that have not taken climate actions comparable to that of home country. Our discussion is mainly on the legality of unilateral EAR under the WTO rules. Given that the inclusion of border carbon adjustment measures is widely considered essential to secure passage of any U.S. legislation capping its greenhouse gas emissions, we argue that, on the U.S. side, in designing such trade measures, WTO rules need to be carefully scrutinised, and efforts need to be made early on to ensure that the proposed measures comply with them. After all, a conflict between the trade and climate regimes, if it breaks out, helps neither trade nor the global climate. The U.S. needs to explore with its trading partners cooperative sectoral approaches to advancing low-carbon technologies and/or concerted mitigation efforts in a given sector at an international level. Moreover, to increase the prospects for a successful WTO defence of the Waxman-Markey type of border adjustment provision, 1) there should be a period of good faith efforts to reach agreements among the countries concerned before imposing such trade measures; 2) WTO consistency also requires considering alternatives to trade provisions that could be reasonably expected to fulfill the same function but are not inconsistent or less inconsistent with the relevant WTO provisions; and 3) trade provisions can refer to the designated special international reserve allowance pool, but should allow importers to submit equivalent emission reduction units that are recognized by international treaties to cover the carbon contents of imported products. The paper concludes by arguing that the major developing countries being targeted by such border carbon adjustment measures should make the best use of the forums provided under the United Nations Framework Convention on Climate Change to effectively deal with the proposed border adjustment measures to their advantage.Post-2012 climate negotiations; Border carbon adjustments; Carbon tariffs; Emissions allowance requirements; Cap-and-trade regime; Lieberman-Warner bill; Waxman-Markey bill; World Trade Organization; Kyoto Protocol; Developing countries; United States

How to Design a Border Adjustment for the European Union Emissions Trading System?

Border adjustments are currently discussed to limit the possible adverse impact of climate policies on competitiveness and carbon leakage. We discuss the main choices that will have to be made if the European Union implements such a system alongside with the EU ETS. Although more analysis is required on some issues, on others some design options seem clearly preferable to others. First, the import adjustment should be a requirement to surrender allowances rather than a tax. Second, the general rule to determine the amount of allowances per ton imported should be the product-specific benchmarks that the European Commission is currently elaborating for a different purpose (i.e. to determine the amount of free allowances). Third, this obligation should apply when the exported product is registered at the EU border, and not after the end of the year as is the case for domestic emitters. Fourth, the export adjustment should take the form of a rebate on the amount of allowances a domestic emitter has to surrender. Five, this rebate should equal the above-mentioned product-specific benchmarks, not the emissions of the particular exporting plant or firm. Finally, the adjustment does not have to apply to consumer products but mostly to basic products.Carbon Leakage, Border Adjustment, Border Tax Adjustment, EU ETS, Competitiveness