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Climate policy and industrial competitiveness – friends or foes?

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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

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Climate policy and industrial competitiveness – friends or foes?

  1. 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. 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. 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. 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. 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. 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. 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. 8 Susanne Dröge 4 November 2015 SWP GermanInstituteforInternationalandSecurityAffairs EU ETS phases I to III Source: Climate Strategies, GMF 2009
  9. 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. 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. 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. 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. 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. 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.
  15. 15. 15 Susanne Dröge 4 November 2015 SWP GermanInstituteforInternationalandSecurityAffairs 3. Looking beyond: gaining competitiveness
  16. 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. 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. 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. 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. 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. 21 Susanne Dröge 4 November 2015 SWP GermanInstituteforInternationalandSecurityAffairs 4. Back to the future
  22. 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. 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. 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. 25 Susanne Dröge 4 November 2015 SWP GermanInstituteforInternationalandSecurityAffairs Thank you very much for your attention! susanne.droege@swp-berlin.org
  26. 26. 26 Susanne Dröge 4 November 2015 SWP GermanInstituteforInternationalandSecurityAffairs Backup slides
  27. 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.

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