Carbon leakage in the EU ETS
Past, present and future
Sander de Bruyn
Coordinator Environmental Economics Department
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 2009
4. Evidence of carbon leakage and role of free allocation
5. Treatment of carbon leakage in 2015-2019 (MTR update)
6. Carbon leakage in the 2030 framework
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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 CO2 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
140
120
140
Target global emissions: 180 Mton
120
.
100
80
Other sectors
Iron and steel
60
Mton CO22
100
Mton CO22
Target global emissions: 200 Mton
80
40
20
20
0
0
Turkey
Other sectors
60
40
Germany 2020
Iron and steel
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Germany 2020
Turkey
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1. Cause and impacts of carbon leakage
Cause: Unilateral climate policies
— Degree of carbon leakage depends on CO2 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)
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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%)
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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
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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 (2009-2013)
• Structural revision of the Carbon Leakage list in 2014 (Mid Term
Review) for allocation in 2015-2019
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3. Outcome of the 2009 allocation for 2013-14
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4. Discussion: does it work?
— Is there evidence of carbon leakage?
— Is free allocation a good way to prevent companies from carbon leakage?
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4. Evidence of carbon leakage from trade data (€n)
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4. Evidence of carbon leakage Ecorys (2013)
Ecorys et al. (2013) for the period 2005-2012: “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
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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):
m
 Pt , EU   t  Pt ,US  (1   EU ,US )( Pt  1, EU   Pt  1,US   )   t  Pco 2 , t 
 
i 1
Price change
EU market
2. Long term equilibrium relation
+ adjustments
1. Price change
US market
3. Price change
CO2 market
n
t  j ,i
Z t  j ,i   t
j 1
4. Control variables:
Stock index, exch.rates
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4. Outcome of empirical estimations
— Steel, cement, refineries EU price does contain CO2 price components
compared to US prices.
— Similar conclusions in other studies: e.g. Alexeeva-Talebi, 2010;
Oberndorfer, 2009; Walker, 2006.
— 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.
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5. Discussions MTR update 2015-2019: costs
— Comitology 2009 assumed strong ETS market with prices ranging between
€ 20-€ 40/tCO2 between 2012-2020 (average € 30/tCO2)
— 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….
35
30
25
20
15
10
EUA
CER
IA price
5
0
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Discussions MTR update 2015-2019: differences
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5. Discussions in the MTR update: impacts
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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 2020.”
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6. Impact of 2030 framework
— EUA price will rise in 2020 because of Phase 4 (2020-2030)
— EUA price will rise after 2020 because of MSR
— EUA price will fall in 2020 because of ‘backloading’
— Point Carbon: Price 2020 € 10/tCO2, afterwards going to € 48/tCO2 (real
values) in 2030
— Industry (IFIEC) rightly points at long-term impact CO2 price (2020 may
not be the right point of departure?)
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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 CO2 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
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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 2005-2012
4. 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
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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), [email protected]