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Impacts on competitiveness of EU ETS

September 2008, Sander de Bruyn

An analysis of the Dutch industry for post-2012 EU ETS

Study design

• Question: which sectors of industry face serious impacts on competitiveness in NL?

• Partial analysis (no direct estimation of CL!)

• Study I: industry• Study II: aviation• Industry finished Jul 2008, aviation

Oct 2008.

Set up in the Netherlands

CE

Partial analysis

Which sectors face potential impacts on competitiveness

CPB

General equilibrium analysis

Carbon leakage, impacts on welfare

X

Industry reactions

Discussion in parliament

Analytical framework

Potentialcost price increase

Effects: competitiveness carbon leakage

Compensation mechanisms

CO2 target + EU-ETS price

QualitativeQuantitative

allocation mechanism

Impacts on profits (net cost priceincrease)

Impacts onprices

Pass throughpossible Effects:

lower demand

Pass throughnot possible

ScenariosExogenous price of CO2• €20 (sensitivity of €50/ ton CO2)Two allocation scenarios: (a) full acutioning; (b) partial grandfathering (only non-electricity part industry)Time dimension: 2005 with targets 2020Sectors:19 sectors and subsectors (2,3,4 digit)Unit of analysis: Cost price increase instead of GVA (links closer

to product prices)

Potential cost price increase

Two cost components1. Direct costs: costs of buying CO2

emission rights2. Indirect costs: higher electricity

price• Electricity model: at €20/tCO2,

electricity prices increase at €14/MWh for industry (LT contracts)

• CHP crucial and data difficult to get

Results: potential cost price increase, auctioning

0%1%2%3%4%5%6%7%8%9%

10%

Nutrit

ionTe

xtiles

Wood

Pape

rGr

aphic

sRe

fineri

es

Petro

chem

ical

Fertil

izer

Othe

r Bas

e Che

mica

ls

Anorg

anic

Chem

icals

Chem

ical p

roduc

tsGl

ass

Build

ing m

ateria

ls

Ceme

nt, ca

lcium,

gyps

um

Ceram

ics ne

c

Iron a

nd st

eel

Alumi

nium

Othe

r non

-ferro

meta

ls

Othe

r indu

stry

Direct ETS CostsIndirect ETS Costs

Potential cost price increase auctioning versus part.grandf.

0%

2%

4%

6%

8%

10%

Nutrit

ionTe

xtiles

Wood

Pape

rGr

aphic

sRe

fineri

es

Petro

chemi

cal

Fertil

izer

Othe

r Bas

e Che

micals

Anorg

anic C

hemi

cals

Chem

ical p

roduct

sGla

ss

Buildi

ng m

ateria

ls

Ceme

nt, ca

lcium,

gyps

um

Ceram

ics ne

c

Iron a

nd ste

elAlu

miniu

m

Othe

r non

-ferro

meta

ls

Othe

r indu

stry

Additional costs auctioningCosts of grandfathering

Sectors or subsectors

0%1%2%3%4%5%6%7%8%9%

Chem

ical s

ector

24Ba

se ch

emica

ls 24

1

Chem

ical p

roduc

ts 24

2_24

7

Othe

r Bas

e Che

mica

ls 24

11, 2

412

Inorga

nic C

hemi

cals

2413

Petro

chem

ical 2

414,2

416,2

417

Fertil

izer 2

415

Cos

t pric

e in

crea

seDirect ETS CostsIndirect ETS Costs

Subsectors or products?

0%1%2%3%4%5%6%7%8%9%

10%11%12%13%14%15%16%17%

Alumin

ium 27

42 (6

0 com

panie

s

Produ

ct prim

ary alu

minium

(2 c..

Cos

t pric

e in

crea

se a

nd p

rodu

ct p

rice

incr

ease

Direct ETS Costs

Indirect ETS Costs

Cost pass through

• Trade intensities with Annex-I and non-Annex I;

• Qualitative and semi-quantitative analysis on cost-pass through (literature review)

Trade intensities•

8 digit level (C

OM

TRAD

E)•

Export and im

port markets

Figure: Export

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Nutrition

Textiles

Wood

Paper

Graphics

Refineries

Petrochemical

Fertilizer

Other base chemical

Inorganic

Chemical products

Glass

Building materials

Cement, calcium and gypsum

Ceramics nec

Iron and steel

Aluminium

Other non-ferro

Other industry

non A

nnex1 n

on E

UA

nnex 1

non-E

UE

U27_IN

TR

A

Qualitative analysis

• Cost pass through depend on transport costs, market niches, market structure, etc.

• EU market: rates depend on literature studies and degree of existing imports from non-Annex I countries

• Exports to non-Annex I countries: no pass through possible

• Exports to Annex-I countries: in between EU market results and non-Annex I countries

Cost pass through (lit.review)

Sector Net cost price increase (%)

Fertilizer Most likely scenario: 0% cost pass through 8,1 Iron and steel Most likely scenario: 50% cost pass through 3,1 Worst case: 6% cost pass through 5,8 Other inorganic chemicals Most likely scenario: 50% cost pass through 2,5 Worst case: 25% cost pass through 3,8 Refineries Most likely scenario: 75% cost pass through 0,2 Worst case: 25% cost pass through 0,6 Cement Most likely scenario: 100% cost pass through 0 Worst case: 50% cost pass through 4,3 Paper Most likely scenario: 30% cost pass through 0,6 Worst case: 0% cost pass through 0,8

Net cost price increase

Compensation measures

• Free allocation• Border tax adjustments• Recycling of revenues- Corporate taxes- Labour taxes- Energy saving investment subsidies

Compensation measures: recycling corporate taxes

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Nutriti

on

Textil

esWo

odPa

per

Graphi

cs

Refine

ries

Petro

chemic

a l

Fertili

ze r

Base

Chem

ical ne

c

Anorg

anic

Chem

ical pr

oduct

sGla

ss

Buildi

ng ma

terials

Ceme

nt, ca l

cium

and gy

psum

Ceram

ics ne

c

Iron a

nd ste

el

Alumin

ium

Other

non-f

erro

Other

indust

ry

without compensationwith compensation

Compensation measures: energy saving subsidies

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Nutr iti

onTe

xtiles

Wood

Paper

Graphi

cs

Refine

ries

Petroc

hemica

l

Fertiliz

e r

Base

Chem

ical ne

c

Anorg

anic

Chem

ical pr

oductsGla

ss

Buildi

ng ma

terials

Ceme

nt, ca l

cium

and gy

psum

Ceram

ics ne

c

Iron an

d stee

l

Alumin

ium

Other

non-fer

ro

Other i

ndustry

without compensationwith compensation

Conclusions: effects on economy and environment• Total direct economic costs small

(0.2% of GDP). • Indirect economic effects differ

between free allocation and auctioning;

• Indirect effects free allocation: higher costs of CO2 compliance;

• Indirect effects auctioning: impacts on competitiveness and CL.

What should we have done different if we could start it all over again?• Using products instead of sectors for

homogenous subsector outputs• Using subsectors for non-

homogenous sector outputs. • Try to model economic costs of free

allocation in order to suggest break even point for free allocation: e.g. if CL is larger than x%, free allocation does more harm than good.

achterpagina CE

Thank you!

bruyn@ce.nl

CE Delft

• Independent, non-profit research & consultancy

• Transport, Energy, Economy

• 40 employees. • Economy: team of 10

environmental economists • Internationally: transport

and inclusion of aviation in EU-ETS

• In the Netherlands: environmental economics

www.ce.nl

Voorpagina CEStudy designSet up in the NetherlandsAnalytical frameworkScenariosPotential cost price increaseResults: potential cost price increase, auctioningPotential cost price increase auctioning versus part.grandf.Sectors or subsectorsSubsectors or products?Cost pass throughTrade intensitiesQualitative analysisCost pass through (lit.review)Net cost price increaseCompensation measuresCompensation measures: recycling corporate taxesCompensation measures: energy saving subsidiesConclusions: effects on economy and environmentWhat should we have done different if we could start it all over again?achterpagina CECE Delft