Carbon leakage in the EU ETS

Transcription

1 Carbon leakage in the EU ETS Past, present and future Sander de Bruyn Coordinator Environmental Economics Department

2 Content of presentation 1. Definition and causes of carbon leakage 2. Mechanisms of carbon leakage and pre-2009 evidence of carbon leakage 3. Treatment of carbon leakage in Evidence of carbon leakage and role of free allocation 5. Treatment of carbon leakage in (MTR update) 6. Carbon leakage in the 2030 framework 2

3 Mton CO2 Mton CO2 1. What is carbon leakage? In the literature 2 definitions can be found (applied to the EU ETS): 1. Carbon leakage refers to the situation where activities that are currently under EU ETS are transferred, for reasons of carbon costs, to areas where they do not fall under climate change policies 2. Carbon leakage refers to the situation where world CO 2 emissions rise due to unilateral climate policies installed in the EU Example: Germany puts 20% cap but iron and steel is now produced in Turkey Target global emissions: 180 Mton Target global emissions: 200 Mton Other sectors Iron and steel Iron and steel Other sectors Germany 2020 Turkey 0 Germany 2020 Turkey 3

4 1. Cause and impacts of carbon leakage Cause: Unilateral climate policies Degree of carbon leakage depends on CO 2 price differential EU/non-EU Companies in international markets may face unfavourable competition from companies without carbon costs Impacts Carbon leakage reduces the efficiency of unilateral mitigation policies Carbon leakage may reduce economic output energy intensive EU companies due to loss in market shares In the end, carbon leakage would then result in loss in employment, losses in GDP, losses in welfare (though effects would be small through mitigating functioning of labour, exchange rate markets) 4

5 2. Pre-2009 evidence of carbon leakage Before 2009, carbon leakage was primarily investigated using economic models Economic models estimated carbon leakage to be between 5-20% in the long-run 3 causes of CL in economic models 1. Investment leakage: physical relocation of industries or new investments only outside EU due to carbon costs (very small) 2. Trade leakage: loss of market shares due to loss of competitiveness (<5%) 3. Energy price leakage: Reduced EU demand lowers world energy prices stimulating consumption outside EU (<20%) 5

6 3. Carbon leakage as crucial element in EU ETS Carbon leakage up to 2007 only academic issue 2007/2008: EC vows plans for allocation in Phase 3: Auctioning accepted as principle allocation mechanism Box 1, Box 2, Box 3 Auctioning rightly interpreted as better allocation mechanism than free allocation Strong industrial lobby against auctioning Political concensus: sectors prone to risk of carbon leakage must be exempted from auctions Discussions what is carbon leakage? how can we measure it? UK IA proposed two indicators: additional carbon costs and openess to international trade. December 2008: Final acceptance of revision EU ETS Directive 6

7 3. Recalling allocation in 2009 for Phase 3 Auctioning accepted as main allocation principle For industry, exemptions were formulated for carbon leakage based on 2 criteria (at NACE 4 level): 1. The additional production costs 2. The trade intensity Four causes for free allocation were formulated 1. The additional production costs >5% and the intensity of trade >10% 2. The additional production costs >30% 3. The trade intensity >30% 4. Qualitative assessments or analyses beyond NACE for sectors The carbon leakage list was constructed in Comitology in 2009 Every year sectors can be added to the list ( ) Structural revision of the Carbon Leakage list in 2014 (Mid Term Review) for allocation in

8 3. Outcome of the 2009 allocation for

9 4. Discussion: does it work? Is there evidence of carbon leakage? Is free allocation a good way to prevent companies from carbon leakage? 9

10 4. Evidence of carbon leakage from trade data ( n) 10

11 4. Evidence of carbon leakage Ecorys (2013) Ecorys et al. (2013) for the period : We found no evidence for any carbon leakage according to the ETS Directive, defined as production relocation due to the ETS in the past two ETS periods Carbon costs are very small The EU is an aging market, investments outside EU reflect proximity to growth markets Energy costs are much more important driver. Carbon costs are only small part of energy costs 11

12 4. Free allocation to combat carbon leakage? Preliminary conclusion: free allocation did do its job? However: crucial assumption: companies do not pass through the costs of freely obtained allowances in product prices Assumption tested by comparing prices of products EU market (with ETS and carbon policies) and US market (without ETS and carbon policies): P Price change EU market P (1 )( P P ) t, EU t t, US EU, US t 1, EU t 1, US 1. Price change US market 2. Long term equilibrium relation + adjustments P t co 2, t 3. Price change CO 2 market m i 1 n j 1 t j, i Z t j, i 4. Control variables: Stock index, exch.rates t 12

13 4. Outcome of empirical estimations Steel, cement, refineries EU price does contain CO 2 price components compared to US prices. Similar conclusions in other studies: e.g. Alexeeva-Talebi, 2010; Oberndorfer, 2009; Walker, It is not by intent of companies that want to make windfall profits. It is the result of price generation on markets. The marginal producer making no profits must pass through the costs of additional allowances (or it will go bankrupt). As a consequence, all producers are then adjusting to new price levels. However, free allocation may combat investment leakage to a certain extent, making investments more attractive in the EU. 13

14 5. Discussions MTR update : costs Comitology 2009 assumed strong ETS market with prices ranging between 20-40/tCO 2 between (average 30/tCO 2 ) But in reality: demand falling short of supply of about 12% in 2012 Prices collapsed dramatically No price restoration foreseen unless structural reforms are being undertaken Clearly: carbon leakage is much less of an issue with prices so low EUA CER IA price

15 Discussions MTR update : differences 15

16 5. Discussions in the MTR update: impacts 16

17 6. Likely outcome MTR 22 January 2014: EC proposal 2030 framework EU ETS: after 2020 LRF of 2.2% (now 1.74%) EU ETS: Market Stability Reserve The Commission strives to guarantee continuity in the composition of the carbon leakage list for the current decade. It will also reflect on how best to take into account the competitiveness concerns of industry in an improved system of free allocation beyond

18 6. Impact of 2030 framework EUA price will rise in 2020 because of Phase 4 ( ) EUA price will rise after 2020 because of MSR EUA price will fall in 2020 because of backloading Point Carbon: Price /tCO 2, afterwards going to 48/tCO 2 (real values) in 2030 Industry (IFIEC) rightly points at long-term impact CO 2 price (2020 may not be the right point of departure?) 18

19 6. Alternatives post-2020 for carbon leakage Bipolair problem: stimulating industry to take low carbon investments through price signal while safeguarding level playing field international competition because of price signal Auctioning delivers in principle better price signal Potential solutions Border tax adjustments (e.g. export rebates or import duties) Shifting basis of CO 2 policies towards consumption and not production E.g. Carbon Added Tax, system of certificates also for imports Auctioning and recycling back to industry in e.g. subsidies for energy saving investments 19

20 7. Conclusions 1. Carbon leakage is a political debate because of putting (part of) industry under auctioning regime in the EU ETS 2. Phase 3 has resulted (intentionally or unintentionally) in largescale free allocation for industrial installations 3. Studies cannot find empirical evidence of carbon leakage in Free allocation may have resulted in (slightly) higher product prices in the EU leading to (slightly) deterioriating competitiveness position; 5. In the MTR no changes are foreseen to the current list. More sectors will apply for qualitative assessment because of substantial profits to be made when put on the CL list 6. Free allocation in the context of the Revised EU ETS Directive can be justified by pointing at post-2020 price developments 7. Alternatives for free allocation post 2020 do exist. Worthwhile to investigate alternative routes 20

21 Thank you for your attention! CE Delft is: Divisions Transport, Energy, Economy, LCA Independent, non-profit research & consultancy 40 employees Economy: team of 8 env. economists Greening of the economy, EU ETS analysis and expansion to aviation/maritime shipping are core business Contact: Sander de Bruyn (PhD), bruyn@ce.nl