Competitiveness Subgroup Report to WG5/6 16 th July 2007

1. Competitiveness SubgroupReport to WG5/6 16th July 2007 • 20th June • introductory notes circulated to subgroup • 22nd June 2007 • kick-off meeting • 28th June • “key points” meeting notes circulated • 29th June • Preliminary questions sent to Michael Grubbs team • 11th July • Meeting with Climate Strategies Michael Grubb, Damien Demailly

2. Meeting 22nd June Outcomes • Concern that such important and potentially consequential work had progressed so far without contact with the industries concerned • Noted recommendation in the CS report that further data input from industry would be beneficial • Noted request from (then) DTI for further data/information from industry • Clear willingness from industry members to provide input into the process • Timescale tight • Further information in the “key notes” circulated • Urgency to set up meeting with CS

3. Meeting 11th July • Very well attended (~28) • Presentations by Michael Grubb and Damien Demailly • Further explanation of the NVAS/MVAS-trade intensity graphs • Detailed review of the work on the cement and steel sectors • Extensive question and answer session

4. Points clarified on 11th July (1/2) • CS is not a consultancy as such but provides a forum for research collaboration • Work has however been funded by UK government amongst others and is considered to be highly significant wrt development of UK policy and position with Europe • CS brings together bodies where previously there was lack of structural communication • Competitiveness work stream is in parallel with CS work on future options for post 2012 & EUETS • OEF work ongoing independently

5. Points clarified on 11th July (2/2) • The interim report does not suggest that competitiveness of UK Ltd is challenged by EUETS but identifies key sectors that are impacted • Sectors considered potentially at risk are analysed down to SIC 4 digit level • Process DOES seek to take account of “leakage” • Uses only standard available industry data sets • Detailed work presented and associated conclusions based on 50% pass through of costs: not necessarily endorsed in other academic papers e.g. 10-40% or indeed endorsed industry experience. • Work only attributes cost pass to direct CO2 and power supply • Process CO2 is ONLY taken into account in cement and steel NOT in other sectors • Opinion expressed that funding was limited, 75% expended, with little time or effort remaining to engage in bilaterals - but potential for minor changes to cement & steel.

6. Subgroup comments on the interim results from 11th July meeting (1/3) • Concern that data used is not representative of current situation. Situation very different for some sectors cf. that in, for instance, 2004 • Concern that assumptions including assumptions about how sectors’ infrastructures are currently developing are incorrect/out of date • Academic work apparently indicated that last few decades had seen little relocation of UK industry abroad… • On the other hand, industry felt that whilst changes might, overall, reflect a limited impact on UK GVA, in fact, basic security of products and stakeholder chains had been severely affected and would continue to be so. • High extent of Opt Out in Phase 1 undermines the assumption/ suggestion in the work that most sectors have the ability to signifcantly pass through costs

7. Subgroup comments on the interim results from 11th July meeting (2/3) • Consultants suggests that there has been no evidence of significant UK job losses indicated (work looks mainly at energy intensive sectors with relatively few employees)…. • BUT takes no account of downstream job losses as a result of closure/relocation e.g. forming, assembly, filling - except to state that this might be a reason against relocation • Work does NOT address; substitution, cross sector and downstream impacts • Finished products are said to be those considered but energy intensive industries are often primary or intermediate stages • NO account taken of impacts on environmental sustainability other than that of CO2 within manufacturing itself e.g. ignores impact of loss of national/local primary production on UK waste stream, and ability to reuse and or recycle within the UK etc. (increased export of waste!) • Ignores significant CO2 reduction impacts that recycling has on manufacturing in the UK • No knowledge of efficiency/sustainability of competitors

8. Subgroup comments on the interim results from 11th July meeting (3/3) • Requires analysis based on profit as well as GVA – CS indicate significant resources required; 92 subsectors at 4 digit level • Requires analysis of how transport affects and is affected by EUETS • Concern that time horizon of 2015 is too short • Only grandfathering is used for any free allocation whereas alternatives may include alternative methodologies e.g. BM • Report indicates possibility of sectoral differentiation; Commission opinion? • The work does not capture industry “tipping points” • Key impacts of some sectors require further investigation e.g. lime on water treatment (consumption and foul water), agriculture, steel etc. • Need to identify which assumptions are incorrect • Need to clarify how “coastal” effects are applied in the UK • CS lacking information on how heterogeneity of sectors affects the impact of EUETS

9. Key Points for next steps • Further liaison is essential • Data (identify sources and values, supply most up to date) • Assumptions (review those in model about current and future structure of industries and supply further input as appropriate) • Identify and potentially incorporate impacts of and impacts on transport • For liaison to be effective with CS it is believed it will require active support by government as no existing structure / requirement for cooperation • Methodology for cooperation requires setting in place quickly as timescale tight • Need to ensure cooperation / consultation on other EUETS work as soon as possible – 2nd work stream, OEF etc. Particularly to prevent “leakage” • What weight will be placed on the CS report wrt UK policy?