Carbon Leakage and Competitiveness focus on heavy industry

1
Carbon Leakage and Competitiveness- focus on
heavy industry -

• Julia Reinaud
• Energy Efficiency and Environment, IEA
• ICC - Commission on Environment and Energy
• 22 October 2008

2
Industrial output growth 1981-2005 Main
products / world regions
Europe
South Asia
North America
China
? A reality most of the growth in
energy-intensive industries has been and will be
outside Europe (e.g. local infrastructure needs,
cheaper energy or raw materials)
Source IEA, 2007, Energy use in the new
millennium.
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Outline

• Definitions of carbon leakage sector
  perspective
• Elements influencing carbon leakage under an ETS
• Preliminary assessment of EU-ETS Phase 1
• Solutions and pitfalls

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Carbon leakage - channels

• Competitiveness-driven carbon leakage
• Short term Immediate loss of market share for
  carbon-constrained industrial products
• Long term Changes in investments
• The fossil fuel price channel
• Increase in prices of low emitting feedstock
  (e.g. recycled scrap metal), lowering its
  consumption in the non-carbon constrained
  countries.
• Lower unitary emissions in new vintages outside
  the region, as the constrained producers process
  innovations may spill over to other regions.

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Competitiveness- driven CL- a national sectors
perspective -
Supply-side driven
Consumption-driven
Based on IPCC definition
Short term Production

• Increase in emissions outside EU
• (as a result of the EU ETS)
• Decrease in emissions in EU
• (as a result of the EU ETS)

Long term Investments
Changes in trade flows as a result of the EU ETS
Indicator of carbon leakage
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Carbon cost impactEstimating orders of magnitude

• Direct costs allowance purchase
• (EUAs currently trading at around 22 /tCO2)
• Indirect costs effect of CO2 price on
  electricity prices
• Ability of a sector to pass-through extra costs
  without inducing increased competition from
  outside
• Which activities? Trade-exposed, energy- or
  GHG-intensive
• Aluminium76, of global output is traded, both
  GHG and electricity intensive
• Iron and steel 32, high CO2 content
• Cement 6 but very high carbon cost per value
  added

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Unit investment estimates in Europe and
allocation (_at_20/tCO2)
Source Reinaud, 2005.
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Which elements influence carbon leakage?
Source Reinaud, forthcoming
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Summary of EU-ETS Phase 1 (2005-2007) Preliminary
assessment

• No statistical evidence of a change coinciding
  with the introduction of the EU ETS
• Great differences btw sectors
• Trade intensity
• EU-ETS costs emissions intensive vs.
  electricity intensive sectors
• Allocation
• but some common features across these
  activities
• High price environment for industrial commodities
  
• Recent slow-down in these activities
• Yet, Phase 1 is a poor indicator of what may come
• End of long-term electricity contracts concluded
  pre-liberalisation
• More stringent targets (i.e. higher CO 2 prices )
• Not enough time to see investment decisions
  change

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Solving carbon leakage?

• Allocation modes (EU, US proposals, Canada, Aus,
  NZ, Sw)
• Free allocation closure rule under an absolute
  cap
• Needs to address indirect cost (electricity) to
  be effective
• Encourages installations to stay
• Allocation follows output volume
• Removes incentive to pass CO2 cost in commodity
  prices
• Border adjustments (US and EU)
• Levelling the carbon costs for imports and
  exports (rebates)
• Include imports in the ETS
• On the basis of which goods? Which CO2 content
  for goods?
• Think carefully about CO2 price effects and
  indirect effects (electricity)
• WTO compatibility uncertain
• Sectoral approaches to be determined

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What is meant by sectoral approaches (SA)?

• Bottom-up sectoral analysis mitigation potentials
  of AI Parties
• Complementary sector-specific goals for AI
  Parties
• Cooperative sectoral approaches supported and
  enabled by finance and technology
• Sectoral crediting in non-AI Parties
• ? What effects on Competitiveness and CL?

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Concluding remarks

• How significant could the carbon leakage problem
  be?
• Do not speculate simulate and monitor expected
  effects
• Short term changes in international trade flows
• Long run changes in investments patterns
• Yet drivers of investment are multiple
• EU sectors are not operating in a vacuum
• A slow down of the booming commodity market would
  certainly accelerate closures and yet one would
  surely not attribute them to climate policy
• Policy / modelling challenge properly defining
  the counterfactual scenario is critical for
  finding evidence of leakage
• Ambitious climate policy implies changing
  relative competitiveness of sectors, encouraging
  low-carbon innovations and preparing for new
  playing field
• ? Policy challenge Balance prime mover advantage
  (RD) with risk of carbon leakage

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Reinaud J. (1st Nov 2008)Issues behind
Competitiveness and Carbon Leakage

• Thank you
• further questions?
• julia.reinaud_at_iea.org
• The ideas expressed in this presentation are
  those of the author and do not necessarily
  represent views of the IEA Secretariat or of the
  IEA member countries