Cost pass-through in strategic oligopoly: Sectoral evidence for the EU ETS

Price adjustments, particularly the cost pass-through relationships, are at the core of the analysis on how asymmetric climate change policy initiates two channels of carbon leakage: (decreasing) market shares and profit margins. Using advanced time-series techniques, this paper explores the pass-through relationships in an oligopoly setting. Under the condition of oligopolistic competition with strategic interactions, the cost pass-through of domestic firms is restricted by strategic interactions with foreign competitors. The empirical section demonstrates that strategic pricing in the presence of the incomplete cost pass-through is by far the prevailing behaviour of German energy-intensive sectors participating in the EU Emissions Trading Scheme (ETS). The relatively low cost pass-through rates in the long-run in most sectors in our sample - in comparison to studies which do not account for strategic interactions - are consistent with earlier findings. Additional costs induced by the EU ETS are therefore likely to be absorbed through a reduction of profit margin, creating incentives to relocate business abroad. Policy implications of the results are that strategic interactions between domestic and foreign firms could be a critical factor in applying offsetting instruments to address carbon leakage domestically. Accounting for oligopolistic structures - with and without strategic interactions - should therefore be a central issue within the broader context of how market structure affects climate change policies. --cost pass-through,strategic oligopoly,emissions trading scheme

Unilateral climate policy and competitiveness: The implications of differential emission pricing

Unilateral emission reduction commitments raise concerns on international competitiveness and emission leakage that result in preferential regulatory treatment of domestic energy-intensive and trade-exposed industries. Our analysis illustrates the potential pitfalls of climate policy design which narrowly focuses on competitiveness concerns about energy-intensive and trade-exposed (EITE) branches. The sector-specific gains of preferential regulation in favour of these branches must be traded off against the additional burden imposed on other industries. Beyond burden shifting between industries, differential emission pricing bears the risk for substantial excess cost in emission reduction as policy concedes (too) low carbon prices to EITE industries and thereby foregoes relatively cheap abatement options in these sectors. From the perspective of global cost-effectiveness we find that differential emission pricing of EITE industries hardly reduces emission leakage since the latter is driven through robust international energy market responses to emission constraints. As a consequence the scope for efficiency compared to uniform pricing is very limited. Only towards stringent emission reduction targets will a moderate price differentiation achieve sufficient gains from leakage reduction to offset the losses of diverging marginal abatement cost.unilateral climate policy design, leakage, competitiveness

Developing Supra-European Emissions Trading Schemes: An Efficiency and International Trade Analysis

Given the coexistent EU priorities concerning the competitiveness of European industries and international emissions regulation at the company level, this paper assesses the efficiency and competitiveness implications of linking the EU Emissions Trading Scheme (ETS) to emerging trading schemes outside Europe. Currently, countries like Canada, Japan or Australia are contemplating the set up of domestic ETS with the intention of linking up to the European scheme. While a stylized partial-market analysis suggests that the integration of trading systems is always beneficial in efficiency terms, our applied general equilibrium approach shows that the aggregate welfare impacts of linking the EU ETS are rather limited. We further find that the trade-based competitiveness effects of linking the European ETS crucially depend on the linked trading system: Although EU economy-wide competitiveness varies only moderately across linking scenarios, the sectoral decomposition of these aggregate effects shows that European industries are much more sensitive to the linking constellation. Similarly, the incentives for non-EU regions to join the European system display considerable heterogeneity. A stricter allowance allocation within domestic ETS can, however, substantially improve the overall prospects for establishing supra-European emissions trading schemes. --Emissions Trading,EU ETS,Linking,Competitiveness,CGE model

Cost pass-through of the EU emissions allowances : examining the European petroleum markets

This paper explores the ability of European refineries to pass-through costs associated with the introduction of the EU Emissions Trading Scheme (EU ETS). We estimated a sequence of vector error correction models (VECM) within a multi-national setting which covers 14 EU member states. Using weekly data at the country level, this paper finds a significant influence of prices for European Union Allowances (EUAs) on unleaded petrol retail prices during the trial phase of the EU ETS from 2005 to 2007. Petrol prices are found to be elastic with respect to crude oil prices and exchange rates but rather inelastic with respect to carbon costs. The long-run elasticity of petrol prices with respect to the EUA prices typically ranges between 0.01% and 0.09%. Furthermore, by computing the variance decomposition our analysis shows that a significant fraction of petrol price changes in Austria, Germany, France and Spain can be explained by changes in allowances prices (between 10% and 20%)

The SUSTRUS model: a CGE model on regional level for sustainability policies in Russia

The present paper describes the construction and first empirical application of the SUSTRUS model (the name of the model refers to “Sustainable Russiaâ€). This model will be the main result of the same-named EU funded project. The SUSTRUS model belongs to the group of regional CGE models, applied to analyze policies with a strong social, economic and environmental dimension. The SUSTRUS model can be used to assist policy makers in their choice of medium and long-term sustainability policies, for the implementation of the EU strategy for sustainable development in Russia as well as an efficient incorporation of the sustainability goals into the existing Russian policy tools on regional and federal levels. The SUSRUS model is constructed as a regional model on federal level, where regions are linked by interregional trade flows, a federal government level and migration. This paper will relate on the calibration of the database for the model and the addition of innovative elements in the model, necessary to model the link between the environmental, social, economic and international modules. The main data sources for the model are the public databases of Rosstat and the micro-level household data from the Russia Longitudinal Monitoring Survey (RLMS). Calibration of the model database was performed by a flexible cross-entropy minimization sub model and standard applied general equilibrium techniques. The general structure of the model will be discussed, focusing on the innovative features of the model and the link between the environmental and economic modules. The application of the model will be shown by a simulation exercise and a presentation of the main results.

Alleviating Adverse Implications of EU Climate Policy on Competitiveness: The Case for Border Tax Adjustments or the Clean Development Mechanism?

Ambitious unilateral EU environmental policy has raised concerns about adverse competitiveness implications for European energy-intensive and export-oriented sectors. We analyze the economic and environmental implications of two different measures to address these concerns in the EU Emission Trading Scheme (EU ETS): border tax adjustments (BTA) and the Clean Development Mechanism (CDM). Numerical simulations with a computable general equilibrium model of the global economy demonstrate that alternative BTA regimes are suitable to alleviate adverse competiveness implications of unilateral European climate policy on energy-intensive and export-oriented industries. The regulatory protection of these industries via subsidies for EU exporters and tariffs for non-EU importers goes, however, at the expense of sectors which are excluded from the EU ETS. We show that the choice of alternative benchmarks (i.e. carbon intensities) for the level of BTA substantially affects these competitiveness implications. The simulations further indicate that limited access to low-cost emission abatement via the CDM in the EU ETS alleviates adverse competitiveness impacts to a comparable extent as the most ambitious BTA scheme. Increasing where-flexibility of emission abatement thus represents an attractive market-based alternative to the application of border tax adjustments in unilateral climate policy. --Emissions Trading,EU ETS,Competitiveness,Border tax adjustments,Clean Development Mechanism,CGE model

Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?

In the absence of an international agreement on climate policy, unilateral carbon abatement creates two problems: It tends to have a detrimental effect on domestic competitiveness, and it leads to an increase in carbon emissions abroad (leakage). This paper analyses two policies that have recently been proposed to mitigate these problems: Border tax adjustments (BTA) and integrated emission trading (IET). The former policy levies a quantity-based, the latter an emission based duty on imports from non-abating countries. In a stylised two-country model we demonstrate that the policies address both problems. However, BTA protects domestic competitiveness more effectively, while IET achieves a greater reduction in foreign emissions. A computational general equilibrium analysis of the unilateral abatement policy adopted by the European Union confirms our theoretical insights for the sectors covered by the offsetting measures. However, the implications for the competitiveness of noncovered sectors are negative. These two effects constitute the central trade-off in the implementation of both policies. --Border Tax Adjustments,Climate Policy,Competitiveness,Emission Trading

Understanding the competitiveness implications of future phases of EU ETS on the industrial sectors

In making key decisions for the future phases of the European Union Emissions Trading Scheme (EU ETS), policy makers need to fully understand the competitiveness implications of these decisions on industrial sectors. In this paper, we conduct an empirical analysis of cost pass-through ability of producers of selected products within the sectors refineries, glass, chemicals and ceramics of the UK economy. Our results provide new insights into the debate on the ability of pass-through of costs generated by the EU ETS. They suggest that some of the sectors analysed have the ability to pass-through a portion of their carbon costs to the consumers: The UK sectors are not capable to completely pass-through their costs into output prices, with the exception of UK ceramic goods. --Emissions Trading,Competitiveness,Cost Pass-Through

Developing Supra-European Emissions Trading Schemes: An Efficiency and International Trade Analysis

Given the coexistent EU priorities concerning the competitiveness of European industries and international emissions regulation at the company level, this paper assesses the efficiency and competitiveness implications of linking the EU Emissions Trading Scheme (ETS) to emerging trading schemes outside Europe. Currently, countries like Canada, Japan or Australia are contemplating the set up of domestic ETS with the intention of linking up to the European scheme. While a stylized partial-market analysis suggests that the integration of trading systems is always beneficial in efficiency terms, our applied general equilibrium approach shows that the aggregate welfare impacts of linking the EU ETS are rather limited. We further find that the trade-based competitiveness effects of linking the European ETS crucially depend on the linked trading system: Although EU economy-wide competitiveness varies only moderately across linking scenarios, the sectoral decomposition of these aggregate effects shows that European industries are much more sensitive to the linking constellation. Similarly, the incentives for non-EU regions to join the European system display considerable heterogeneity. A stricter allowance allocation within domestic ETS can, however, substantially improve the overall prospects for establishing supra-European emissions trading schemes

Unilateral climate policy and competitiveness: The implications of differential emission pricing

Unilateral emission reduction commitments raise concerns on international competitiveness and emission leakage that result in preferential regulatory treatment of domestic energy-intensive and trade-exposed industries. Our analysis illustrates the potential pitfalls of climate policy design which narrowly focuses on competitiveness concerns about energy-intensive and trade-exposed (EITE) branches. The sector-specific gains of preferential regulation in favour of these branches must be traded off against the additional burden imposed on other industries. Beyond burden shifting between industries, differential emission pricing bears the risk for substantial excess cost in emission reduction as policy concedes (too) low carbon prices to EITE industries and thereby foregoes relatively cheap abatement options in these sectors. From the perspective of global cost-effectiveness we find that differential emission pricing of EITE industries hardly reduces emission leakage since the latter is driven through robust international energy market responses to emission constraints. As a consequence the scope for efficiency compared to uniform pricing is very limited. Only towards stringent emission reduction targets will a moderate price differentiation achieve sufficient gains from leakage reduction to offset the losses of diverging marginal abatement cost