Session 3: CO 2 Price Effects on EU Industry. Neil Walker

Transcription

1 Session 3: CO 2 Price Effects on EU Industry Neil Walker

2 Key Points Focus on non-electricity sectors, especially cement No evidence to date indicating adverse impacts on macro-economic performance Sectors most exposed account for circa 1% of GDP and 0.5% of employment But influential and prominent in shaping the debate Pass-through of opportunity costs in cement Ex ante expectation (~80%) different from ex post reality (0%-20%). Some considerations shaping outcomes in regard to cement Geography Spain vs Germany Stage in the economic (and construction) cycle Spain vs Germany Availability of excess capacity Turkey, Egypt and China The future new capacity Importance of the counterfactual Influence of shipping costs?

3 Presentation Outline How EUA costs affect energy-intensive industries Contingent nature of the impact on industry product prices Implications for competitiveness at sectoral level and the profitability of individual firms Some empirical evidence from ex-post analysis of the cement sector during First Phase EU ETS

4 COMETR (2007) framework Similar matrix framework approaches have also been developed and used by the UK Carbon Trust and by Climate Strategies

5 Industry sub-sectors initially selected for ex-post analysis on the basis of competitive exposure Cement and clinker (CIRED/UCD) Aluminium (IEA) Iron and steel (CIRED/CDC) Refining (MIT/IEA)

6 Energy-intensive firms producing traded commodity goods Climate Strategies (2008) Assuming EUA price 20 and an induced electricity price increase of 10/MWh.

7 Twin effects: producers versus consumers Marginal abatement cost curve for industry sector EU Allowance market price Pass-through rate of marginal CO 2 costs into industry product prices Reduced CO 2 emissions intensity in production Reduced consumption, switching to substitute products and/or Carbon Leakage (depending on the elasticity values)

8 Potential impact of EUA allocation design on marginal emissions cost Pure Grandfathering Current emissions levels have no bearing on future free allocations. Grandfathering with baseline updating The payoff from abatement projects may be partly offset by smaller free allocations in future. Output Based Allocation (OBA) The marginal cost per emitted Tonne is equal to the budgeted average cost of purchased EU Allowances.

9 Uncertain effect on product prices under Grandfathering Installations may consider that all EU Allowances carry an opportunity cost equal to their market price e.g. power pool bids They may instead choose (or feel compelled) to budget only the average cost of purchased Allowances e.g. Portland cement? D ly (2007)

10 Ex-ante predictions cement 2004 study by Oxera Consulting on behalf of the UK Carbon Trust Simple oligopoly competition model Demand elasticity influences the profit impact of increased prices resulting from reduced output However, the optimal (profit maximising) % pass-through rate of EUA costs into cement market prices depends only on the industry structure (i.e. the number of firms)

11 Predicted pass-through rate for cement exceeded the average cost of purchases 100% 90% 80% Rate of Cost Pass-through 70% 60% 50% 40% 30% 20% 10% 0% Oxera predicted that 83% of marginal EUA costs would be passed through to customers. Assuming relatively inelastic demand, the cement producers should benefit because of their free Allowances Number of Firms Operating in Market All firms subject to cost One firm not subject to cost

12 Preliminary ex-post data Observed pass-through rates in several EU cement markets during 2005 and 2006 were substantially lower than had been predicted Some abatement projects being undertaken, but not sufficient to explain this outcome Strategic behaviour by producing firms? Managerial objective might be to maintain domestic market share rather than maximise short run profits Concerns about new entrants, particularly for domestic firms located near the coast

13 How might EUA costs influence future investment location? First, need to assess the counterfactual What was happening prior to EU ETS? Then assess whether EU ETS pushes the firm towards a tipping point in terms of the locational choice

14 Cement kiln asset life (>30 years) requires long term regulatory view Free allocations - NER 90% net gain? profit neutral? unviable? 0%

15 Schematic - Cement Production Fuel + Air Gypsum, Slag, Limestone additions 0.2 Tonnes Raw materials Clinker CEM II Cement 1.1 Tonnes 0.8 Tonnes 1.0 Tonnes Fuel-derived CO 2 emissions 0.28 Tonnes Process-derived CO Average emissions intensity in EU is circa Tonnes 0.71 Tonnes CO2 per Tonne of finished cement, roughly equivalent to 0.89 Tonnes per Tonne of clinker. This assumes bituminous coal to be the primary kiln fuel. Source: Cembureau

16 Abatement Short term Kiln fuel substitution (at a negative marginal cost, but politically controversial) Better fuel efficiency recover waste heat More efficient grinding Reduced clinker content blends Longer term CO 2 capture and storage Possibly in conjunction with Oxy-firing Geo-polymers rather than limestone based

17 Production and Trade Data

18 Cement production volumes selected EU countries Million Tonnes Portugal Greece UK Germany France Italy Spain

19 Cement/clinker imports to EU15 from outside the EU Portland Cement and Clinker Imports to EU15 from Outside EU25 clinker cement TOTAL Million Tonnes

20 Opportunistic behaviour Surplus kiln capacity available from Turkey, then Egypt, then China Mediterranean countries (especially Spain) have invested in clinker grinding plants

21 Spanish import vs. domestic prices Euro per Tonne note the apparent similarity of clinker prices - but not of cement prices clinker import cement import clinker domestic cement domestic

22 Will rising seafreight costs impact on Chinese clinker exports? BDI value Freight cost US$/Tonne Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 0

23 Intra-EU15 - Cement Import Prices and Marginal Cost 80 cement_price coal_cost elec_cost EUA_cost Pass-through rate appears very low if it is assumed that the marginal cost per emitted Tonne of CO 2 is 0.71xEUA price 10 0 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07

24 Cement prices by country Walker (2006) estimated pass-through into selected market prices Initial analysis based on point data from commercial database, subsequent confirmed by Eurostat data Wide variations between neighbouring countries Pass-through rates of marginal EUA cost are typically below 25% Possibly over-estimated - some of the observed price increases may due to kiln capacity availability becoming tighter

25 France annual cement prices Consumption Market Price Million Tonnes Euro per Tonne

26 Germany annual cement prices Consumption Market Price Million Tonnes Euro per Tonne

27 Italy annual market prices Consumption Market Price Million Tonnes Euro per Tonne

28 Spain annual market prices Consumption Market Price Million Tonnes Euro per Tonne

29 Chinese clinker/cement exports in 2005 Million Tonnes There is no obvious reason to suppose that Spanish kiln operators are less cost competitive against non-eu competition than those in other EU countries. The anomalous trade pattern may simply be due to Spanish demand growth outstripping capacity. If so, any unwillingness or inability to invest locally in new kilns evidently pre-dates the inception of EU ETS. Similar issues arise in the USA? USA Spain South Korea UAE Bangladesh Asia (unspecified) Nigeria Hong Kong Kuwait Quatar Ghana Saudi Arabia Angola Vietnam Iran

30 Ratio of Kiln Capacity to Apparent Cement Consumption - Spain

31 Ongoing cement work CIRED/UCD Is the situation currently prevailing in Spain likely to be repeated elsewhere in Europe? If so, is it attributable to EU ETS? Econometric analysis using data from Eurostat, Cembureau, OECD and commercial databases Cement net exports as a proxy for competitiveness Kiln capacity (relative to consumption) emerges as a more significant factor than relative variable cost

32 Steel Making

33 Primary and Secondary Routes Basic Oxygen Furnace Direct fuel emissions of 1.9 Tonnes CO 2 per Tonne of steel (Eurofer/IEA) Electric Arc Furnace Direct fuel emissions of 0.15 Tonnes CO 2 Indirect CO 2 emissions of 0.25 Tonnes CO 2 arising from consumption of electricity

34 Intra-EU15 steel import prices 900 Flat Rolled Steel Flat Rolled Plated Steel EUA marginal cost - BOF process Euro per Tonne Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

35 Intra-EU15 Import Prices: value-added steel products Euro per Tonne Semi Finished Steel (1) Semi Finished Steel (2) Semi Finished Steel (3) Semi Finished Steel (4) Semi Finished Steel (5) Two distinct groups: - low volume, high value - low value, high volume 0 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

36 Thank you Contact:

37 References Carbon Trust, 2004, The European Emissions Trading Scheme: Implications for Industrial Competitiveness Climate Strategies, 2008, Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts D ly, 2007, Assessment of the competitiveness impacts of EU ETS on industry, presented to workshop at École Polytechnique Fitzgerald, J and Scott, S, 2007, in Competitiveness Effects of Environmental Tax Reforms (COMETR) Walker, N, 2006, Concrete Evidence, UCD Working Paper 06/10