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Challenges for Trade in the Copenhagen Process Hearing of the European Parliament 10.11.2009

Challenges for Trade in the Copenhagen Process Hearing of the European Parliament 10.11.2009 Karsten Neuhoff Research Director ‘Climate Policy Impact and Industry response’ German Institute for Economic Research (DIW Berlin). Outline. Why is carbon leakage on the trade agenda?

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Challenges for Trade in the Copenhagen Process Hearing of the European Parliament 10.11.2009

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  1. Challenges for Trade in the Copenhagen Process Hearing of the European Parliament 10.11.2009 Karsten Neuhoff Research Director ‘Climate Policy Impact and Industry response’ German Institute for Economic Research (DIW Berlin)

  2. Outline • Why is carbon leakage on the trade agenda? • What are the solutions? • How does it link to Copenhagen? Karsten Neuhoff

  3. Potential for leakage is focused on a few sub-sectors Allocation dependent (direct) CO Allocation dependent (direct) CO costs / GVA Lime Lime 2 2 Electricity (indirect) CO Electricity (indirect) CO costs / GVA costs / GVA 2 2 40% 40% At Stake (MVAS) At Stake (MVAS) Other inorganic Other inorganic 30% 30% basic chemicals basic chemicals At Stake (NVAS) At Stake (NVAS) gVa gVa Fertilisers & Nitrogen Fertilisers & Nitrogen 20% 20% Differentiation and dynamics of EU ETS industrial competitiveness impacts. Jean-Charles Hourcade, Damien Damailly, Karsten Neuhoff and Misato Sato, Michael Grubb, Felix Matthes and Verena Graichen gVa gVa Cement Cement and Net Potential Maximum Potential Maximum Basic iron & steel Basic iron & steel 10% 10% Refined petroleum Refined petroleum Pulp & Pulp & Paper Paper Aluminium Aluminium 0% 0% UK UK 0.0% 0.0% 0.2% 0.2% 0.4% 0.4% 0.6% 0.6% 0.8% 0.8% 1.0% 1.0% GDP GDP Price increase assumption: CO Price increase assumption: CO = = € € 20/t CO 20/t CO Electricity = Electricity = € € 10/MWh 10/MWh 2 2 2; 2; Karsten Neuhoff

  4. Other building materials Leaner structures Lower clinker content Substitution Efficiency Leakage Clinker imports Cement imports A carbon price works through the value chain Cement Concrete Building Clinker Karsten Neuhoff

  5. CO costs Price level 2 Cost Cost Conditional free allocation State Aid Government led sectoral agreement Initial evaluation • Little substitution to low carbon products/services • Distorts investment • Bureaucratic constraints for innovation • Risk of lock-in • Has to be aligned with international climate engagement • Requires at least informal international cooperation • Requires strong policies of developing countries • Risk of low common denominator Three approaches address leakage for exposed sectors CO CO costs costs 2 2 Price level Price level Cost Cost Border adjustment Border adjustment Border adjustment Karsten Neuhoff

  6. ( ) ( ) • Provide incentives for producers in countries not covered by carbon pricing • Provide assurance to voters about competitiveness concerns • Avoid relocation of production of carbon intensive commodities • Facilitate a move from free allowance allocation to auctioning Possible objectives of BA • Provide incentives for other countries to pursue more ambitious climate policy Karsten Neuhoff

  7. Objective of international cooperation on limiting use of BA • create confidence among developing countries that border adjustment is limited; measures which discriminate against their producers will not be applied. • facilitate the implementation of carbon taxes or emissions trading with full auctioning to expose producers and consumers to the full carbon cost and address leakage concerns for a narrow set of carbon intensive activities. • reassure the trade community that measures which create complexities, non-tariff barriers, or may otherwise undermine free trade will not be implemented. Neuhoff and Ismer. International Cooperation to limit the use of Border Adjustment. Climate Strategies Workshop Report. Available online: http://www.climatestrategies.org/component/reports/category/27/79.html Karsten Neuhoff

  8. Summary • Border measures is the wrong instrument to encourage participation of countries/industries • Border measure to address leakage? • Leakage is only an issue for narrow set of commodities • Difficult to demonstrate no concern • Real issue if you want carbon prices >50 $/tCO2 • > Default: free allocation, limits mitigation & innovation • Border adjustment to facilitate auctioning • Can be non-discriminating against outside producers • Cooperate to ensure economic/environmental focus Karsten Neuhoff

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