Susanne Droege. German Institute for International and Security Affairs (SWP).
Autumn Seminar 2015. Climate change: Implications for technological developments and industrial competitiveness.
Jornada organizada por FUNSEAM y la Cátedra de Energía de Orkestra-Instituto Vasco de Competitividad con la colaboración de Fundación Repsol.
4 de Noviembre de 2015. CAMPUS REPSOL. Madrid, España
Climate policy and industrial competitiveness – friends or foes?
1. 1
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Climate policy and industrial
competitiveness – friends or foes?
Susanne Droege
German Institute for International and Security Affairs (SWP)
Panel III Climate change policy: economic implications for industrial
competitiveness
Conference “Climate Change: Implications for Technolgical
Developments and Industrial Competitiveness”
4 November 2015, Campus Repsol, Madrid
2. 2
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Outline
1. Introduction
2. Looking back: carbon leakage and industry
3. Looking beyond: gaining competitiveness
4. Back to the future
3. 3
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
1. Introduction – a changing international
scene
When the EU ETS phase III (2013 – 2020) was discussed this was
under the anticipation of unilateral climate policy, in particular
unilateral carbon pricing. Basis: Kyoto Protocol 2nd CP
Competitiveness impacts could translate into carbon leakage
(„industry channel“)
Previous phases with generous free allocation, but phase III with
auctioning of allowances
2015: Climate policy beyond 2020 with INDCs from 146 UNFCCC
parties, including US, China, India and other key emitters
4. 4
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
2. Looking back: carbon leakage and industry
The carbon leakage investigations at the global level relate to the
Kyoto Protocol‘s impact with a world divided in mitigating and
non-mitigating parties to the KP. Impact on energy demand and
energy prices
Industry channel. What will happen to energy-intensive industries if
the EU ETS (a) includes full auctioning? (b) delivers an increasing
price signal? sectors at risk of carbon leakage
Similar debates and related analyses: US, Australia, Japan
5. 5
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Carbon leakage
The carbon leakage investigations at the global level relate to the
Kyoto Protocol‘s impact with a world divided in mitigating and
non-mitigating parties to the KP. Impact on energy demand and
energy prices
Industry channel. What will happen to energy-intensive industries if
the EU ETS (a) includes full auctioning? (b) delivers an increasing
price signal? sectors at risk of carbon leakage
Similar debates and related analyses: US, Australia, Japan
6. 6
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
CO2 emissions concentrated in a few sectors
with primary activities (UK example)
Potentialmaximumgrossvalueaddedatstake(MVAS)
andnetgrossvalueaddedatstake(NVAS)
Cement
Basiciron&steel
Lime
Fertilisers & Nitrogen
Aluminium
Other inorganic
basic chemicals
Pulp &
Paper
Malt
Coke oven
Industrial gases
Non-wovens
Refined petroleum
Household paper
Hollow glass
Finishing
of textiles
Rubber tiers
& tubes
Copper
Casting of iron
UK
GDP
Allocation dependent (direct) CO2 costs / GVA
Electricity (indirect) CO2 costs / GVA
Price increase assumption: CO2 = €20/t CO2; Electricity = €10/MWh
Flat glass
Veneer sheets
0%
10%
20%
30%
40%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0%
4%
2%
Potentialmaximumgrossvalueaddedatstake(MVAS)
andnetgrossvalueaddedatstake(NVAS)
Cement
Basiciron&steel
Lime
Fertilisers & Nitrogen
Aluminium
Other inorganic
basic chemicals
Pulp &
Paper
Malt
Coke oven
Industrial gases
Non-wovens
Refined petroleum
Household paper
Hollow glass
Finishing
of textiles
Rubber tiers
& tubes
Copper
Casting of iron
UK
GDP
Allocation dependent (direct) CO2 costs / GVA
Electricity (indirect) CO2 costs / GVA
Price increase assumption: CO2 = €20/t CO2; Electricity = €10/MWh
Flat glass
Veneer sheets
0%
10%
20%
30%
40%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0%
4%
2%
Electricity
cost
increase
(blue);
cost for
buying all
allowances
(grey) -
relative to
gross value
added.
UK Study examined 159 subsector activities and identified a “top 20+3” for which combined cost impacts @ €20/tCO2
exceed 4% of Sector Value Added.
These activities account for 1% of UK GDP (Climate Strategies 2007: Hourcade, Neuhoff, Demailly and Sato, Differentiation and dynamics of EU
ETS industrial competitiveness impacts)
7. 7
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Germany
Graichen et al. 2009 , in: Grubb, Brewer, Houser & Sato, ‘Climate policy and industrial competitiveness:
ten lessons from the EU ETS’, German Marshall Fund – US, Washington DC, 2009; 20€ t/CO2
Electricity
cost
increase
(blue);
cost for
buying all
allowances
(grey) -
relative to
gross value
added.
8. 8
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
EU ETS phases I to III
Source: Climate Strategies, GMF 2009
9. 9
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
What to do about carbon leakage?
Nationally
determined
climate policy
with carbon
pricing
Price
with
carbon
cost
Little substitution to low carbon
products/services
Distorts investment
May constrain innovation
Risk of lock-in
Requires strong policies of
developing countries
Risk of CO2 price set by
lowest common
denominator
Inside
EU ETS
Outside
EU ETS
Inside
EU ETS
Outside
EU ETS
Value of allocation
cancels out cost
of CO2
Inside
EU ETS
Outside
EU ETS
Fiscal,
process
standard
or
allowance
adjustment
at border
Price
without
carbon
cost
Inside
EU ETS
Outside
EU ETS
No mechanism
a) Conditional free
allocation/ revenue
recycling
b) Border
adjustments
c) sectoral
agreements or
INDC-based
cooperation
Potential problems with
WTO/trade relations
Requires at least informal
international cooperation
Sectoral
agreement
with CO2
cost in all
major
production
10. 10
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
One size fits all?
Effects from carbon pricing:
direct and indirect operation cost increase
Cost recovery depends on ability to pass them through
Pass-through depends on:
– International/national competition
– Regulation (indirect costs)
– Market structures
– Abatement costs reducing emissions or electricity consumption
– Share of carbon costs in overall cost structure, elasticities
(demand, substitutes)
11. 11
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
EU approach to carbon leakage from EU ETS
(phase III 2013 – 2020)
Legislation: Art 10a of EU ETS Directive: >5% cost increase and
>10% trade intensity; or either >30% cost increase or >30% trade
intensity
Carbon leakage list (2009): 2013 – 2014, amendments made
according to qualitative assessments
Review 2014: list for 2015 – 2019
Benchmarking (product-specific)
Sectors and subsectors on the list receive free allowances:
– 100% if belonging to 10% most efficient producers in the sector
– Less than 100% (80% in 2013, reduced per annum to reach 30%
in 2020)
Indirect carbon cost: Article 10(6) gives Member States the
possibility to compensate the most electro-intensive sectors through
national state aid schemes
12. 12
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Carbon leakage list (Art 10a EU ETS Directive)
results
Source: Juergens et al., 2012, Climate Policy
13. 13
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Trade intensity and cost thresholds for ‘at risk of
leakage’ – a glimpse into UK data
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Carbon Cost as % of GVA
Tradeintensity
Source: Carbon Trust analysis of UK data
NACE 4 digit sector
Trade intensity
> 30%
Cost impact
> 30% GVA
Cost impact
> 5% GVA
trade intensity
>10%
May be assessed
qualitatively
14. 14
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Energy consumption per tonne of cement
clinker above benchmark in 2011
Source: Neuhoff et al. (2014): Staying with the Leaders: Europe’s path to a low carbon economy.
www.climatestrategies.org, DIW Berlin Calculations based on Cement Sustainability Initiative – GNR
database.
16. 16
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
At the country level: Global Competitiveness
Index, 2013-2014.
Three European countries among the top 5
Source: Neuhoff et al. (2014): Staying with the Leaders: Europe’s path to a low carbon economy. www.climatestrategies.org.
DIW Berlin Calculations based on Schwab, K., Sala-i-Martín, X., 2013.
17. 17
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Carbon pricing in other world regions/countries
Source: Neuhoff et al. (2014): Staying with the Leaders: Europe’s path to a low carbon economy. www.climatestrategies.org
DIW Berlin Calculations based on Ecofys, 2013; Sopher, P., Mansell, A., 2013; OECD, 2013; Jotzo, F. et al., 2013; Rudolph, S.,
Kawatsu, T., 2012; Ptak, M., 2010.
18. 18
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Energy intensity and average energy prices
1990 - 2005
Countries with higher energy prices are more energy efficient.
19. 19
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Competitiveness due to energy and climate
policy?
The competitiveness indicator of the World Economic Forum puts
15% weight on the innovative capacity of a country and 1% on the
electricity infrastructure. Several European countries are among the
global leaders on innovation across all low-carbon
technologies.
Europe spends a similar proportion of its GDP on energy as the
United States and other major competitors. Prices stimulate higher
efficiency and countries with higher energy prices are often more
energy efficient. Fig 9 staying with the leaders
20. 20
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Special treatment for a few sectors
In Europe a few key sectors deserve (and get) special treatment.
8% of manufacturing industries spend more than 6% of their
revenue on energy. For some of their energy intensive processes,
energy price differentials to the rest of the world can matter.
(Germany: for 92% of manufacturing, energy bills are on average
less than 1.6% of revenue)
However, energy price differences with competitors due to
differences in natural resource endowment can only be compensated
for through additional efforts on energy efficiency and
innovation.
21. 21
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
4. Back to the future
22. 22
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
EU 2030 Energy and Climate Framework
(EU INDC)
Greenhouse
Gases
All sectors
Sectors covered by
the European
Emissions Trading
Scheme
Sectors not covered
by the European
Emissions Trading
Scheme
At least -40%
from 1990 levels
-43% from 2005
levels
-30% from 2005
levels
Renewable
Energy
Renewable energy
share in gross final
energy consumption
-27% of European
level
Energy Efficiency Absolute reduction in
primary energy
demand compared to
a BAU case
-27% (indicative)
23. 23
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
EU ETS carbon leakage post 2020
EU legislation after Paris COP21 in 2016
For the carbon leakage procedure, public consultations in 2014 with
stakeholder meetings
Modernisation of the provisions and their application needed:
- first two rounds: assumption of a 30€ / t carbon price – which
never materialised
- Reform plans for the EU ETS beyond 2020
- International competition: other countries pricing activities, esp.
China (major trade partner in sectors at risk)
24. 24
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
A changing landscape – INDC projections
First analyses of INDCs from major emitting countries (EU, US,
Japan, China, India, Brazil) show
– energy efficiency gains play a vital role in delivering on national
targets and that the power sector is equally important: efficiency
of plants, increase of REN shares
– Electrifcation of final demand (e.g. transport) needed
– Industry: EEI vital for achieving overall emissions reductions; in
China share of secondary sector in overall GDP to decline
Drivers of national energy demand: GDP and population
Potential of co-benefits: reducing energy imports, innovation
Carbon pricing: EU and China (but not included in INDC explicitely)
25. 25
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Thank you very much for your attention!
susanne.droege@swp-berlin.org
27. 27
Susanne Dröge
4 November 2015
SWP
GermanInstituteforInternationalandSecurityAffairs
Energy cost share German industry
Source: Neuhoff et al. (2014): Staying with the Leaders: Europe’s path to a low carbon economy.
www.climatestrategies.org Calculations by Climate Strategies based on Destatis.