C&L Concerns: Border Carbon Adjustment, Equivalent Policy, Free Allowances or None of the Above?

Transcription

1 C&L Concerns: Border Carbon Adjustment, Equivalent Policy, Free Allowances or None of the Above? Peter Wooders Senior Economist, Climate Change, Energy & Trade

2 Basis of IISD s Work Bali to Copenhagen Trade & CC Programme Border Carbon Adjustment (Overview Paper) Options for Policy Makers: Addressing Competitiveness, Leakage and Climate Change (Draft for Discussion) OECD Round Table on Sustainable Development, July 23, 2009, Singapore Border Carbon Adjustment and Free Allowances: Responding to Competitiveness & Leakage Concerns

3 Competitiveness the ability [of a sector] to sell goods and services under free and fair market conditions (Lipsey, 1991) Leakage Defining C&L reductions in GHG emissions resulting from the introduction of a PAM in a country are partially or fully offset by increased GHG emissions in other countries

4 Options to reduce C&L impacts BCAs (Border Carbon Adjustments) GHG allowances auctioned Tax imports on carbon content, rebate exports Free Allowances x% given free, differentiated by sector Equivalent Policy e.g. one country has an ETS, another a technology standard, a third a renewable energy portfolio standard CBDR Common But Differentiated Responsibility

5 State of Play (June 2009) Competitiveness & Leakage concerns are being taken seriously and responded to for sectors considered to be at risk of leakage Energy-Intensive Industry (+ Power), 1-5% of GDP EU ETS (Energy & CC Package, Dec. 2008) Free allowances at best available technology BCAs (and/or others) if no international agreement Waxman-Markey (US, May 2009) Rebates of 85% direct emissions, 100% indirect BCAs possible from 2025 at earliest (Presidential review)

6 Are these responses appropriate? (as they may become locked in) 1. Are free allowances effective in reducing competitiveness & leakage impacts? 2. How many free allowances should be given? 3. Do we have the data we need? Will we? 4. Are free allowances a subsidy? [Joëlle] 5. Would BCAs be an effective alternative? 6. Could BCAs be implemented? 7. What account should be taken of alternative policies in other countries?

7 1. Are Free Allowances Effective? Certainly at keeping industry happy! Economic theory under an absolute cap Short-term: whether allocation is free or auctioned should not affect production level Long-term: more free allowances improves financial position of a company How would this affect location and production decisions? Free allowances may encourage production to stay local extent very difficult to gauge Output-based rebates reduce effective carbon cost on a pro-rata basis reduce leakage and abatement

8 2. How many free allowances should be given? a. Define a compensation level principle A company with a GHG-intensive process should see its profits fall (if it does nothing) Auctioning + BTAs reduce profit b. Is industry already (partially) compensated? Depends on the allocation scheme details Allocation updating and closure provisions dilute costs Flanking Measures are common(?) c. How does the specific market work?

9 2. How many free allowances should be given? (2)

10 3. Do we have the data we need? Will we? Very little empirical data to date Modelling requires, inter alia Estimate of pass-through cost potential Supply and demand in the industry Market characterisation Products and their interactions, trade routes, etc. Range of assumptions (C price, transport cost, ) Drivers of long-term location decisions Even if a long time series of data were available, could we separate out GHG effect?

11 5. Would BCAs be an effective alternative? Sector-specific modelling shows BCAs largely effective Sector-specific characteristics important Global Equilibrium modelling shows fuel price channel erodes overall reductions Reductions of fuel use in constrained country reduce world fuel prices, increasing demand and emissions BCAs tend to move compliance costs from protected sectors to the rest of the economy BCAs reduce welfare to all

12 6. Could BCAs be implemented? Legally (WTO) Must be a response to environmental leakage Would need to apply to all countries (MFN) How would CBDR be considered? Administratively Measuring carbon fiendishly difficult Trade-off between accuracy and effectiveness Set taxable carbon level at best available technology? May be much below sector average

13 7. What account should be taken of alternative policies in other countries? CBDR provision: act according to historic responsibility and capacity Waxman-Markey would compare direct and indirect costs of all measures, x 60% But sector-level cost comparison not the same as national-level GHG emission comparison BCAs appear at odds to CDBR What is comparable effort? Reductions? Costs? Incentives? Abatement cost?

14 Are these responses appropriate? (as they may become locked in) 1. Free allowances expensive, likely to be ineffective 2. Optimal level of free allowances very uncertain 3. We don t, probably won t, have the data we need 4. Are free allowances a subsidy? [Joëlle] 5. BCAs somewhat effective in leakage reduction, but welfare loss to all 6. Legal and admin issues limit choices, effectiveness 7. Can we make the case that BCAs and CBDR are compatible?

15 Sector Allocation EC Proposal, 23 January 2008 Electricity Generation, 100% auctioning Carbon Capture and from 2013 Storage Sectors at significant risk of carbon leakage Sectors not at significant risk of carbon leakage Will receive up to 100% of their allowances for free in % auctioning 2013, linear increase to 100% in 2020 Final Energy & Climate Package, 12 December % from 2013 in electricity generation but with a derogation of at least 30%, rising linearly to 100% in 2020, for certain Member States 100% auctioning for CCS 100% free allowances to the extent that they use the most efficient technology 20% auctioning 2013, linear increase to 70% in 2020 with a view to reaching 100% by 2027