© OECD/IEA - 2007

Competitiveness & carbon leakage Competitiveness & carbon leakage – focus on the EU Emissions Trading Scheme -– focus on the EU Emissions Trading Scheme -

Julia ReinaudEnergy Efficiency and Environment, IEA

ICTSD28 November, 2008

© OECD/IEA - 2007

Carbon cost impact:Carbon cost impact:Estimating orders of magnitudeEstimating orders of magnitude

Starting point: the EU emissions trading scheme (EU ETS) introduces cost on industry and power generation – other regions lag behind in climate policy ETS developing in: Australia / Switz. / Canada / US States Discussions in US Congress / Japan (mandatory) / South Korea

Concern: enhanced competitiveness of non carbon constrained producers could lead to ‘carbon leakage’ E.g. Reductions achieved by the EU ETS could result in higher

emissions elsewhere

Direct costs: allowance purchase Emissions-intensive industries (EUAs currently trading at around €15 /tCO2)

Indirect costs: effect of CO2 price on electricity prices Electricity-intensive sectors

© OECD/IEA - 2007

Competitiveness- driven CLCompetitiveness- driven CL- - a national sector’s perspective a national sector’s perspective --

Short term:Short term:ProductionProduction

Longer term:Longer term:InvestmentsInvestments

Supply-side Supply-side drivendriven

Consumption-Consumption-drivendriven

Increase in emissions outside EU (as a result of the EU ETS)

= Decrease in emissions in EU

(as a result of the EU ETS)

Changes in Changes in trade flowstrade flows as a result of the as a result of the EU ETSEU ETS = Indicator of carbon leakage= Indicator of carbon leakage

© OECD/IEA - 2007

Summary of EU-ETS Phase 1 Summary of EU-ETS Phase 1 (2005-2007) (2005-2007) Preliminary assessmentPreliminary assessment

No statistical evidence of a change coinciding with the introduction of the EU ETS

Great differences btw sectors … Trade intensity EU-ETS costs: emissions intensive vs. electricity intensive sectors Allocation

… but some common features across these activities High price environment for industrial commodities Recent slow-down in these activities

Yet, Phase 1 is a poor indicator of what may come End of long-term electricity contracts concluded pre-liberalisation More stringent targets (i.e. higher CO 2 prices ) Not enough time to see investment decisions change But can we identify CO2 price effects on production and invts?

© OECD/IEA - 2007

What measures are suggested?

1. Free allocation of GHG allowances to carbon leakage exposed sectors

2. Carbon equalisation system (i.e. border adjustment)

3. Sectoral approaches

4. Lowering the level of the mitigation target

© OECD/IEA - 2007

Assessment of measures with int’l implications

Sectoral approaches (SA)Pros and limitations Limits to support?

Border adjustments (BA)(In)effectiveness of current proposal (EU)

Questions on the table… ‘comparability of action’

Tracking CL =continuous monitoring trade flowsMeasurable impact of CO2 policy in the EU?More challenging when ROW starts taking action