Carbon Pricing 4. Industrial Competitiveness - free allocation and - PowerPoint PPT Presentation

Carbon Pricing 4. Industrial Competitiveness - free allocation and border adjustments

Among the main political obstacles to strengthening carbon pricing is concern about adverse effects on industrial competitiveness

A risk for only a few industries

The main concern is the risk of “carbon leakage”

Emissions Intensive Trade Exposed

Trade exposure (cost pass through) Many bulk Power Emissions commodities generation intensity (proportion of total costs) Light Many manufacturing services

Systems define eligible industries on this basis • EU: Emissions intensity x trade exposure > 0.2 • South Korea • California: tiered

Emissions Intensive Trade Exposed industries • Iron and steel • Cement • Some bulk chemicals • Oil refining • Aluminium – electricity intensive

Free allocation of allowances

Free allocation of allowances • Does not vary with emissions • Reduces average costs • Retains marginal costs

Advantages of free allocation • Reduces leakage risk • Focusses assistance on industries that need it • Can be adapted to a carbon tax

Bench- mark for Support direct rate Tons of emissions x direct Free emissions Allowances Production (Emissions (tonnes (%) Trading GHG / = Systems) tonne - or - x product) Tons of Tax-Free (tonnes of Emissions Bench-mark Bench-mark Support product) (Carbon for electricity for carbon rate Tax) per tonne of x x intensity of electricity product electricity emissions (MWh / tonne (tonnes GHG/ (%) product) MWh)

Little evidence to date of leakage due to EUETS • Free Allocation has prevented leakage? • Carbon prices have been generally low? • Risk is not large? • Leakage is difficult to observe?

Limit to EITE industry or there is a risk of windfall gains (e.g. in the power sector)

Price ($/MWh) Electricity demand price rise Supply cost with carbon price + free allocation With carbon Supply cost with price = carbon price double gain Without carbon price Generation (MWh)

Problems with free allocation • Carbon pricing does not feed through to consumer prices • Risk of over-allocation • May reduce management attention • No incentives for other jurisdictions to remove support • Difficult to find free allowances as cap comes down

Border Adjustments

Advantages of border adjustments • Everyone pays the carbon price • More efficient signals created

Border Adjustments • Electricity imports in Western Climate Initiative • EUETS Directive allows • Application to cement has been seriously discussed in California and EU

Problems with border adjustments • Resource shuffling • Bypass by moving down the value chain • Administrative costs • GATT unlikely to be a major barrier • Political challenges

High carbon production Low carbon production North America EU

Tougher environmental regulations in long run benefit companies (Porter Hypothesis)

Best way to ensure competitiveness is investment in new low carbon technologies

Border Adjustments