EU climate policy & economic competitiveness

Thomas Legge, Program Officer, German Marshall Fund of the United States

Peterson InstituteMarch 4, 2009

Overview of presentation

•

Context: uneven climate policy in an interlinked world

•

Climate policy in the European Union

•

Competitiveness concerns in Europe

•

Responses in the EU Climate & Energy Package

•

Assessment of these measures

Challenge: heterogeneous climate policy in an interconnected world

• CO2

is a transboundary

pollutant

• Emissions trading is a logical response

• Leakage: flight of industrial activity to regions with fewer carbon controls

Relevance of the EU experience

• A functioning Emissions Trading Scheme• An absolute cap on emissions from almost 50 percent of the economy• A carbon price• A varied and large economy• Similar debates about competitiveness

Negotiation

European Commission

EU CouncilEuropean Parliament

Policymaking in the European Union

Proposal

“Co-decision”

procedure

Legislation

A timeline of EU climate regulation

•2°C

Carbon tax

proposed

Emissions trading system

proposed

1992

2001

2005 - 2007

20202050

2008 - 2012

EU ETS Phase I

2005-2007

EU ETS Phase I

2008-2012

EU climate & energy package

Medium-

term target

Long-term target

EU political debate: competitiveness cost of unilateral action

Cement industry: “At current CO2

prices of 25 per tonne, approximately 80 percent of clinker production will be offshored

if no

free allowances are allocated”

Alliance for Energy-Intensive IndustriesThe EU ETS could lead to “an enormous risk of de-

industrialisation”

in Europe due to higher power prices

Empirical evidence for leakage is limited…

International Energy Agency:Climate policy would only negatively impact the

competitiveness of a few manufacturing industries and is likely to have a fairly limited effect on output and

employment levels

Neuhoff

et al. (2008):

Detailed analysis for Germany and the UK shows that

only 1 percent to 2 percent of GDP is associated with activities

that face significant cost increases from carbon pricing

…but it may be a real problem on the margins

The EU climate & energy package, Dec 2008

20 percent reduction in GHG

emissions

20 percent share of renewable

energy

20 percent reduction in

energy consumption

+ commitment to reduce GHG emissions by 30 percent if there is a global deal in Copenhagen

Carbon capture & storage

Auto standards

Fuel emissions

EU Climate & Energy Packagecompetitiveness measures

• Economic efficiency through emissions trading• Selective coverage• Multi-annual compliance periods • Force majeure provisions

•

Allocation for free (“grandfathering”) in transition phase

• Phase I & II: 90 percent allocated for free• Phase III: 100 percent auctioning for power sector: 10-15 percent rise in electricity prices expected

• Other sectors: 70 percent auctioning by 2020

• 100 percent auctioning by 2027 • But exemptions foreseen…

EU Climate & Energy Packagecompetitiveness measures (contd.)

Free allocation for certain energy-intensive sectors if “they are at significant risk of carbon leakage”

• Applies only to entities using best available technologies• Likely to benefit aluminum, hot-rolled steel and slabs, clinker

EU Climate & Energy Packagecompetitiveness measures (cont.)

Criteria for exemptions• If EU ETS increases production costs by >5 percent of gross value added, and• If total value of sector’s exports and imports divided by the total value of its turnover and imports exceeds 10 percent

• Or: if EU ETS increases production costs by >30 percent of gross value added

• Or: if total value of exports and imports divided by the total value of its turnover and imports exceeds 30 percent

EU Climate & Energy Packagecompetitiveness measures (contd.)

• EU solidarity fund• 10 percent of permits reserved for transition countries

• “Carbon equalization system”

proposed:

• additional free allocations • inclusion of carbon-intensive imports from third countries in the EU ETS• exclusion of EU exporters of carbon-intensive products

EU Climate & Energy Packagecompetitiveness measures (contd.)

EU ETS carbon prices, 2006-7

€35

€30

€25

€20

€15

€10

€5

€0

Risks: price volatility

€35

€30

€25

€20

€15

€10

€5

€0

Risks: price volatility

Risks: inefficient outcomes

• Continued use of carbon-intensive processes & technologies• Windfall profits• Uncoordinated national responses

Other approaches

• Border tax adjustments• Price floors/caps

Conclusion

• Leakage is a concern for a limited part of the economy• It is difficult to prove causality between climate policy and leakage• The EU addresses leakage through allocation• Measures to address leakage have implications• A global climate deal could neutralize the leakage problem

Thank you for your attention!

Thomas Legge, Program Officer, German Marshall Fund of the United States

1744 R Street, NWWashington, DC 20009T: (+1) 202 683 2627F: (+1) 202 265 1662

http://www.gmfus.org/climate/index.cfm