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 gt 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 gtgt 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