Understanding Carbon Leakage: Trade Flows and Costs Impact on Climate Policy

1. Trade flows and costs passed through As two critical elements of carbon leakage Sander de Bruyn bruyn@ce.nl

2. Carbon Leakage Foundation • There is trade with non-EU countries where carbon has no price until 2020 so that exports from EU to these countries will diminish and imports from these countries will grow, resulting in carbon leakage. • To protect the world from carbon leakage (and EU industries from costs), EUAs are better allocated for free. • Companies prone to carbon leakage cannot pass through the costs of EUAs anyway, so windfall profits are not an issue. • Environmental effectiveness stay the same under free allocation, so climate policy of EU is guaranteed. Sander de Bruyn/18 November 2009

3. Free allocation or auctioning • Environmental impact in 2020 within the EU: Stays the same (-21%). • Cost allocation differs: With auctioning costs are largely paid by companies, with free allocation costs are largely paid by consumers • Risks differ: Auctioning gives risks of carbon leakage, free allocation gives risks of windfall profits energy-intensive companies and shifting the burden of costs to labour intensive industries. • Economic efficiency differs: Auctioning is more efficient resulting in a lower EUA price • Environmental impacts long term differ: A lower EUA price gives more stimulus to more stringent targets and hence auctioning gives a better signal for LT climate policies. • Hence the claim that environmental effectiveness is similar is not true in the long-run. Sander de Bruyn/18 November 2009

4. Are all non-EU countries potential places of CL? • Carbon leakage discussion assumes that only EU industries are under climate policies in 2020. • However, under a new treaty more countries are likely to accept binding targets. • For imports and exports to these countries costs may be just passed onto the consumers. Sander de Bruyn/18 November 2009

5. Set up • Analyzing trade flows and cost patterns between EU and non-EU markets for: • Steel • Products from refineries; • Chemicals (Chlorine/PVC); • Cement • Other products • Analyzing the trade intensity: ({import + export}/{productie + import} • CL: trade intensity >30% (or trade intensity >10% and costs/GVA>5%). • For 2005-2008 we will observe price differences in CO2 markets, EU price and non-EU price for (some of these) commodities). Sander de Bruyn/18 November 2009

6. Refineries: imports Sander de Bruyn/18 November 2009

7. Refineries: exports Sander de Bruyn/18 November 2009

8. Steel and steel products: imports Sander de Bruyn/18 November 2009

9. Steel and steel products: exports Sander de Bruyn/18 November 2009

10. Chemical sector: imports of chlorine Sander de Bruyn/18 November 2009

11. Chemical sector: imports of PVC Sander de Bruyn/18 November 2009

12. Chemical sector: exports of PVC Sander de Bruyn/18 November 2009

13. Chemical sector: PVC cost pass through? Sander de Bruyn/18 November 2009

14. Conclusions • EU net exporter of energy-intensive products. • Some of the costs of energy-intensive products have probably been passed through in the product prices, though scientific evidence is sometimes difficult to obtain using econometric analysis. • Large share of the exports and imports come from Annex B countries that, in 2020, will have their own climate change policies. Therefore windfall profits might even increase in 2020 compared to now. Sander de Bruyn/18 November 2009

15. Thank you for your attention Sander de Bruyn CE Delft bruyn@ce.nl