Risk and reality of carbon leakage

1. Risk and reality of carbon leakage Observations on the reports of Climate Strategies & Carbon Trust European Parliament EU ETS roundtable 10 June 2008 Contribution Vianney Schyns IFIEC Europe

2. Climate Strategies Impact on Gross Value Added at € 20/ton CO2 and € 10/MWh: • Key observations • Sectors with GVA impact > 4% are … all EU ETS sectors + some others • Impact triples at expected higher prices, e.g. Deutsche Bank € 67/ton by 2020 • Study is not conclusive whether leakage will not occur, on the contrary … • Leakage is likely for all sectors, at higher CO2-prices

3. Carbon Trust Carbon price signal: lower product demand (price elasticity), higher demand of substitutes, fewer exports & more imports = carbon leakage: • Key observations • Economists argue degree of price elasticity • Carbon Trust modelled leakage >> lower demand • This is more than “a few percentage points” • Report mentions all EU ETS sectors and signals either likelihood of leakage • or major uncertainties

4. Climate Strategies & Carbon Trust Three solutions against leakage: (1) global carbon market – sectoral agreements, (2) Border Adjustments, (3) benchmarks in proportion to actual production – dynamic benchmarking • CS & CT dislike solution 3: loss of carbon price signal • But solution 3 provides clear carbon signals: • Resistance to “update” of allocation, new entrants and closures (same benchmark for existing & new entrant plants), market share competition, exactly like auctioning • Carbon price signal to combat leakage, the opposite of auctioning & ex-ante frozen allocation • Typical statement of Carbon Trust: “The actual degree of emissions “leakage” combines many uncertanties in demand, trade and abatement responses” • Conclusion: There is either loss of profits and loss of carbon price signal, or carbon leakage, or a combination thereof