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Competitiveness protection

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This presentation was part of the session "International Trade: Consumption Based Emissions and Carbon Reduction Border Tax Adjustments" at the Istanbul Carbon Summit in April 2014. Martijn Overgaag, …

This presentation was part of the session "International Trade: Consumption Based Emissions and Carbon Reduction Border Tax Adjustments" at the Istanbul Carbon Summit in April 2014. Martijn Overgaag, Unit Manager Industrial Processes at Ecofys, presented insights on "Competitiveness protection" and why border tax adjustments might be more efficient and effective than giving out free allowances.

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  • 1. Competitiveness protection Better tax imports than compensate inland producers Martijn Overgaag 03/04/2014
  • 2. © ECOFYS | | Better tax imports than compensate inland producers > Many different national/regional GHG-combat mechanisms will coexist > Regions need to recognize competitive disadvantage compared to peers – Compensation schemes are mostly “free allowance” based – Effects are dynamic; – Compensation schemes become increasingly complex. > Border tax adjustments are more efficient and effective than giving free allowances – Adjusting border taxes provides incentives for importing supply chains too – Adjusting taxes is also good for treasury of the country; – Taxes may replace ‘general’ import and export levies that harm developing countries. > Getting the numbers right is equally complicated as benchmark developments; > Introduce tax, but also exemptions for importers that have a demonstrated comparable effort 03/04/2014 Martijn Overgaag
  • 3. © ECOFYS | | Current greenhouse gas emission trends projected to warming > 2 degrees 03/04/2014 Martijn Overgaag http://climateactiontracker.org/assets/publications/publications/CAT_Trend_Report.pdf
  • 4. © ECOFYS | | World Bank report 2013 “Mapping carbon pricing initiatives” 03/04/2014 Martijn Overgaag Ecofys is now preparing the 2014 edition of the World Bank Carbon Pricing Report which will be launched at Carbon Expo in May, 2014. Full report: http://www.ecofys.com/files/files/world-bank-ecofys-2013-mapping-carbon-pricing-initiatives_summary.pdf Coming soon
  • 5. © ECOFYS | | Cap & trade system • Guarantee environmental outcome and let the market determine the price; • Have economy make investments where reductions are cheapest. Price (€ / t CO2) = f (real emissions, emission rights available) Time Total emission rights in ETS C A P C A P € Emission right Cap and trade system What is a Cap-and-trade system? Martijn Overgaag03/04/2014
  • 6. © ECOFYS | | Introducing carbon costs to manufacturing supply chains is an effective means to fight global carbon emissions… …if costs are implemented only in a specific region, competitiveness may be distorted: Carbon Leakage Martijn Overgaag03/04/2014
  • 7. © ECOFYS | | Determination of carbon leakage risk: trade and cost Martijn Overgaag03/04/2014
  • 8. © ECOFYS | | > In Australia assistance factor is multiplied with average intensity, instead of benchmark level. 03/04/2014 Martijn Overgaag Carbon leakage classification and assistance factors in 3 ETS regions EU ETS California Australia CL High High Medium Medium No CL Low No CL 100% 80%30% 100%50% 100%30% 100% 94.5% 66% 0%
  • 9. © ECOFYS | | Eligibility criteria for CL compensation in EU 03/04/2014 Martijn Overgaag Trade ratio Inducedcarboncostratio 10% 20% 30% 10% 20% 30% Maximum compensation EU
  • 10. © ECOFYS | | Eligibility criteria for CL compensation in EU versus Australia 03/04/2014 Martijn Overgaag Trade ratio Inducedcarboncostratio 10% 20% 30% 10% 20% 30% Maximum compensation EU Maximum Compensation AUS Medium Compensation AUS
  • 11. © ECOFYS | | Eligibility criteria for CL compensation in EU versus California 03/04/2014 Martijn Overgaag Trade ratio Inducedcarboncostratio 10% 20% 30% 10% 20% 30% Maximum compensation EU Maximum Compensation CAL Medium Compensation CAL
  • 12. © ECOFYS | | What to do when more and more countries have an ETS, and incompatible competitiveness protections? U.S Cement importing 03/04/2014 Martijn Overgaag Based on publicly available data from United State Geological Survey, above figure shows volumes imported Portland cement to U.S by different countries from 2001 - 2011. The figure shows that imports declined after 2006, specifically from China. Since 2009, Canada is by far the largest import source. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canada Korea China Colombia Mexico Taiwan Greece Sweden Spain Denmark Other countries ktonneproduct Year Fact Source: Ecofys for State of California: work in progress
  • 13. © ECOFYS | | Challenge: comparing efforts of third countries Comparison of third country commitments to reducing GHG emissions – Japan, South Korea, Australia have ambitious policy in place, possibly comparable to EU; – China, India: emerging mandatory policy packages, impact for industry uncertain yet; – Brazil, Indonesia, South Africa show less strict policies: voluntary actions; – Russia, Canada, USA: laggards, no coherent, ambitious and national policy framework in place or to come. > Comparison of GHG efficiencies between EU and third countries Limited availability on carbon efficiencies complicates cross-country:  Public data sources are not a good basis for cross-country GHG efficiency comparisons due to serious flaws in combing data from different sources;  Exceptions consist of the aluminum and cement industry where company data is collected in a methodologically sound and transparent way. 03/04/2014 Martijn Overgaag Source: Oeko Institut e.V./Ecofys: Support to the Commission for the determination of the list of sectors and subsectors deemed to be exposed to a significant risk of carbon leakage for the years 2015 - 2019 (EU Emission Trading System), January 2013.
  • 14. © ECOFYS | | Options to introduce border carbon adjustments > Include importers in the Cap-and-Trade Program. Importers are subject to full Cap-and- Trade requirements as covered entities. The drawback is that the current allowance budget under the Cap-and-Trade Program does not account for emissions associated with potential production outside of California due to leakage. > ‘Linked cost’ for importers with no market mechanism. Importers are subject to a cost calculated based on (Emissions obligation x Cap-and-Trade allowance price(s)), but there is no provision for market flexibility. > Create an independent allowance pool for importers with equivalent program stringency. Two possibilities are related to this option: > a. Replicate a ‘mini’ Cap-and-Trade allowance pool with full market mechanism. > b. Create a simplified purchase/sales system with equivalent program stringency. 03/04/2014 Martijn Overgaag Source: Ecofys for State of California: work in progress
  • 15. © ECOFYS | | Border tax adjustments is better than free allowances, both on effectiveness and efficiency Environmental effectiveness • carbon leakage rate • inside emissions saving • global emissions saving • certainty Distributional impact • consumer impact • firm impact • fiscal cost Efficiency • welfare cost/ton global GHG, • welfare cost/ton domestic GHG Feasibility • domestic • international • institutional Administrative cost 03/04/2014 Martijn Overgaag But: international feasibility is a key challenge. However: no reason to back away from taking the challenge Source: Ecofys/Vivid Economics for DECC: work in progress
  • 16. © ECOFYS | | How to push the supply chain into low carbon: 95 g/km Ecodesign 03/04/2014 Martijn Overgaag Source, THE SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED, 2014 http://www.ecofys.com/en/publication/economic-benefits-of-the-eu-ecodesign-directive/
  • 17. © ECOFYS | | Better tax imports than compensate inland producers > Many different national/regional GHG-combat mechanisms will coexist > Regions need to recognize competitive disadvantage compared to peers – Compensation schemes are mostly “free allowance” based – Effects are dynamic; – Compensation schemes become increasingly complex. > Adjusting border taxes provides incentives for importing supply chains too – Adjusting taxes is also good for treasury of the country; – Taxes may replace ‘general’ import and export levies that harm developing countries. > Getting the numbers right is equally complicated as benchmark developments; > Introduce tax, but also exemptions for importers that have a demonstrated comparable effort 03/04/2014 Martijn Overgaag
  • 18. © ECOFYS | |03/04/2014 Martijn Overgaag Please contact us for more information Ecofys Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht The Netherlands I: www.ecofys.com Martijn Overgaag T: +31 (0)30 662-3232 E: m.overgaag@ecofys.com