Climate Strategies Press Release: EU climate policy must stand up to industry fears over competitiveness
- EU can avoid ‘carbon leakage’ through tailored approaches to energy intensive industries, according to new report by climate academics
European policy makers must resist calls by energy intensive industries to water down the third phase of the Emissions Trading Scheme (ETS) which will force most utilities to buy their carbon permits at auction from 2013. A new report, ‘Tackling leakage in a world of unequal carbon prices’, published today suggests that the European Commission should not simply allocate free carbon permits to industries most at risk from losing business to countries not bound by emissions targets. Instead policy makers should assess the cost implications and investment needs for specific industry sectors and apply tailored solutions such as border taxes, subsidies and in some cases free permits.
Ahead of a meeting in the European Parliament tomorrow which is set to examine the sectors most at risk from ‘carbon leakage’ - the possibility that unilateral carbon pricing could lead trade-exposed, energy-intensive industries to replace domestic production by imports, or to relocate production to foreign countries – Climate Strategies, a network of climate academics, looks at the potential for carbon leakage from those energy-intensive sectors that contribute most to the emissions under the EU ETS, namely cement, steel and aluminium, recommending a screening process that would arm policy makers with the tools to prevent companies within those sectors from relocating to countries outside the EU where they would be ‘free to pollute’.
Susanne Dröege, author of the report;
“One of the major arguments against a unilateral climate policy like the EU ETS is that no other region has as yet embarked on a similar carbon pricing scheme, putting European industry at a significant disadvantage if they have to auction the allowances. Companies in energy intensive sectors might shift activities and consumption patterns in favour of foreign supply, effectively shifting emissions and making EU carbon pricing less effective. Addressing this challenge needs careful consideration how businesses will react to the carbon costs.”
The principal findings of the report are:
· The carbon price differential will continue to be a challenge for international industries in the mid to long term because of the slow process of establishing national emissions trading schemes and the difficulty in linking them to one another.
· A few energy-intensive sectors should be subject to screening with the focus of effort being on the few sectors where carbon cost impacts are relatively high. Although steel, cement and aluminium are high profile cases in this context; they differ significantly in their exposure. Ignoring the different sectoral characteristics when implementing remedies against carbon leakage will neither deliver the carbon price signal for low carbon production in the ETS territory nor tackle carbon leakage from energy intensive sector.
· Carbon leakage from industrial activities cannot be addressed by one single approach.
The screening of each sector in terms of its cost impacts and investment needs shows that different tools to address leakage could work for different sectors which would leave policy makers with a number of remedies to apply, for example sectoral deals, free allocation and border adjustment.
Dröege continues;
“It’s clear that the potential that emissions shift to outside EU-territory hinges on the behaviour of a few energy-intensive sectors, including cement, steel and aluminium, but also refineries and some basic chemicals, and their ability to pass through carbon costs. As these sectors emit a high share of the capped CO2 under the EU ETS and face competition from global markets, they deserve special attention.”
The report recommends that a tailored approach to specific sectors, such as the introduction of an import tax for cement production, would be the most effective way of avoiding leakage.
Dröege said:
“Border adjustment is more suited to the cement sector than any other industries due to the homogenous nature of cement production around the world. Existing data indicates that there is a marked lack of variation in energy and carbon intensity between major cement producing regions. While a border carbon adjustment may represent the most suitable short to medium response to tackling leakage concerns for cement, such an approach would need to be brought in line with the international climate agenda and trade rules in an understanding about its limited application to protect the climate using national emissions trading.”
The report concludes that measures for tackling leakage should be made compatible with the long term policy goals of reaching an international agreement on emissions reductions by country or sector and the creation of global carbon pricing.
According to Dröege:
“As the EU suggests establishing an OECD-wide carbon market by 2015, the future design of its ETS sets the stage for, and needs to be aligned with, other emerging cap and trade schemes such as in the United States, Australia or Japan.”
“One government or region alone will not be able to deliver the reliable framework for industries that compete in international markets. That is why there is no alternative to bringing forward international cooperation to mitigate emissions.”
ENDS
For media enquiries about the Climate Strategies report please contact either Nick Faith or Sophie Larder at Luther Pendragon on 020 7618 9100.
Notes to editors
About Climate Strategies
Climate Strategies aims to assist governments in solving the collective action problem of climate change. It connects leading applied research on international climate change issues to the policy process and to public debate, raising the quality and coherence of advice provided on policy formation.
We convene international groups of experts to provide rigorous, fact-based and independent assessment on international climate change policy. To effectively communicate insights into climate change policy, Climate Strategies works with decision-makers in government and business, particularly, but not restricted to, the countries of the European Union and EU institutions.
The Climate Strategies report is available online at http://climatestrategies.org/our-reports/category/32/153.html
