Em bargoed until publication 2 0 Novem ber 2 0 0 7 Industrial competitiveness impacts of the EU ETS EU ETS Review Seminar, Stockholm, 11 Oct 2007 Professor Michael Grubb Chief Economist, the Carbon Trust and Director, Climate Strategies Senior Research Associate, Faculty of Economics, Cambridge University And Visiting Professor, Imperial College Drawing on research convened by
Em bargoed until publication 2 0 Novem ber 2 0 0 7 Presentation of results from Climate Strategies study The Differentiation and Dynamics of EU ETS Competitiveness impacts Jean-Charles Hourcade & Damien Demailly, CIRED, Paris Karsten Neuhoff , Misato Sato and Michael Grubb EPRG, Faculty of Economics, Cambridge Faculty of econom ics Additional contributions from: Felix Matthes, Oeko-Institute, Berlin and Joachim Eichammer, Fraunhofer ISI Karlsruhe Convened by:
Competitiveness is a sector/ product issue At aggregate sector level (using 3 digit (Standard Industrial Classification 92), energy and metals production stand out Vertical range gives Em bargoed until publication 2 0 Novem ber 2 0 0 7 insights on: Electricity MVAS: Max.GVA at stake 20% Potential maximum and net gross value added at stake - Marginal cost (no free allocation) increase (top end NVAS: Net GVA at stake (100% of bar) free allocation; exposure to electricity price only) -Impact of electricity Basic Metals price pass through (incl. Iron & Steel) 15% (bottom end of bar) Pulp, Paper, Coke oven, Printing & refined petroleum & Combined with Publishing 10% Fabricated metal nuclear fuel horizontal axis gives Cement, insights on: Plastic lime& - possible dynamics & rubber plaster Food & of impacts Non-Ferrous Metals tobacco 5% - Scope for Electrical & optical auctioning? Machinery Glass & equipment Ceramics Chemicals Note: Process Transport Textiles Wood emissions and onsite 0% equip. 0% 10% 20% 30% 40% 50% emissions included UK trade intensity from Non-EU Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/mwh
.. And trade intensity within EU is bigger than international trade intensity even for the UK Em bargoed until publication 2 0 Novem ber 2 0 0 7 MVAS: Max.GVA at stake Electricity 20% (no free allocation) Potential maximum and net gross value added at stake NVAS: Net GVA at stake (100% free allocation; exposure to electricity price only) 15% Coke oven, Basic Metals Fabricated refined petroleum (incl. Iron & Steel) metal & nuclear fuel 10% Pulp, Paper, Printing & Transport Publishing equipment Plastic & Electrical & Rubber optical Cement, Food & Non-Ferrous equipment 5% lime& tobacco Metals plaster Glass & Ceramics Machinery Chemicals Wood Textiles 0% 0% 10% 20% 30% 40% 50% 60% UK trade intensity from within the EU Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/mwh
Em bargoed until publication 2 0 Novem ber 2 0 0 7 Presentation of results from Climate Strategies study The Differentiation and Dynamics of EU ETS Competitiveness impacts Subsector analysis (4-digit SIC code level) Convened by:
‘Construction’ sector: cement production dominates emissions, high MVAS, relatively low NVAS, accounts for c.10% of aggregated sector value-added 35% Total sector GVA Man. of cement in 2004 Em bargoed until publication 2 0 Novem ber 2 0 0 7 £3,359 million Potential maximum and net gross value added 30% Manufacture of cement Man. of concrete products for construction purposes (SIC 26.51); GVA £409 million (2004) 25% at stake (MVAS/ NVAS) Man. of plaster products for construction purposes Man. of ready0mixed 20% concrete Manufacture of lime (SIC 26.52); Man. of other articles of 15% concrete, plaster and GVA £26 million (average 1997-1999) cement MVAS 126% Cutting, shaping and finishing of stone 10% Production of abrasive products 5% Man. of other non0metallic .mineral products n.e.c 0% Man. of lime 0% 20% 40% 60% 80% 100% Non- EU Trade Intensity Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
Iron and Steel: Basic Iron & Steel production (blast furnace) dominates emissions, MVAS c.25% , c.10xNVAS, accounts for half sector value-added 30% &Man.of basic iron Total Sector GVA steel and of Em bargoed until publication 2 0 Novem ber 2 0 0 7 in 2004 )ferro0alloys (ECSC £2,139 million Potential maximum and net gross value added Man. of cast iron tubes 25% Man. of steel tubes at stake (MVAS/ NVAS) 20% Manufacturing of basic iron and steel (SIC 27.10); Cold draw ing GVA £1,064million (2004) MVAS 27%. 15% Cold rolling of narrow strip Cold forming or folding 10% Wire draw ing 5% Casting of iron Casting of steel 0% 0% 20% 40% 60% 80% 100% Non-EU Trade Intensity Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
Energy processing dominated by refineries Em bargoed until publication 2 0 Novem ber 2 0 0 7 Total sectoral 12% GVA for 2004 £2,627 million Potential maximum and net gross value added Manufacturing of refined 10% petroleum (SIC 23.20); GVA £2,300 million (2005)* at stake (MVAS/ NVAS) 8% 6% 4% Manufacturing of coke oven products (SIC 23.10); GVA £10 million (average of 1998- 2% 2002). 0% 0% 20% 40% 60% 80% 100% Non-EU Trade Intensity Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWhh
Other sectors tend to more complex substructure with more product diversity & lower carbon intensity of most processes Food, beverage tobacco Em bargoed until publication 2 0 Novem ber 2 0 0 7 Textiles & leather Wood, paper and pulp Chemicals Plastics and rubber Glass and ceramics Non-ferrous metals (high electricity intensity) Total of 1 5 9 product categories exam ined
Cement & BOS steel stand out, in total, 23 product categories representing c.1% of UK GDP have MVAS> 4% or NVAS> 2% at €20/ tCO2 CO2 cost screen: Sectors potentially exposed under unilateral CO2 pricing Lime Lime Em bargoed until publication 2 0 Novem ber 2 0 0 7 Potential maximum gross value added at stake (MVAS) Potential maximum gross value added at stake (MVAS) 40% 40% Allocation dependent (direct) CO 2 costs / GVA Allocation dependent (direct) CO 2 costs / GVA and net gross value added at stake (NVAS) and net gross value added at stake (NVAS) Electricity (indirect) CO 2 costs / GVA Electricity (indirect) CO 2 costs / GVA Other inorganic Other inorganic Household paper Household paper 30% 30% Casting of iron Casting of iron basic chemicals basic chemicals Non-wovens Non-wovens Copper Copper Industrial gases Industrial gases Flat glass Flat glass Coke oven Coke oven Veneer sheets Veneer sheets Fertilisers & Nitrogen Fertilisers & Nitrogen Malt Malt 20% 20% Rubber tiers Rubber tiers Basic iron & steel Basic iron & steel & tubes & tubes Cement Cement Hollow glass Hollow glass Finishing Finishing 10% 10% of textiles of textiles Refined petroleum Refined petroleum Aluminium Aluminium Pulp & Pulp & Paper Paper 4% 4% 2% 2% 0% 0% UK UK 0.0% 0.0% 0.2% 0.2% 0.4% 0.4% 0.6% 0.6% 0.8% 0.8% 1.0% 1.0% GDP GDP Price increase assumption: CO 2 = €20/t CO 2; Electricity = €10/MWh Price increase assumption: CO 2 = €20/t CO 2; Electricity = €10/MWh Hourcade et.al. Differentiation and dynamics of EU ETS industrial competitiveness impacts.
Em bargoed until publication 2 0 Novem ber 2 0 0 7 Presentation of results from Climate Strategies study The Differentiation and Dynamics of EU ETS Competitiveness impacts I ntepretation of subsector analysis Convened by:
Cem ent and Basic I ron and Steel MVAS in the range 25-35% of total value added implies EU Em bargoed until publication 2 0 Novem ber 2 0 0 7 ETS will have significant impact on sector economics NVAS of c.2% (cement) – 3.5% (steel) implies that 100% free allocation will keep the gross cost impact “within the noise” compared to other temporal and geographical influences on costs Both have carbon-intensive intermediate product: clinker (for cement), coke (for steel) With fixed allocation: – Huge tension in pricing decisions between short-run profit maximisation, and long-run market share protection – Strong incentive for leakage : import the finished or intermediate product, and sell the surplus allowances
Constraints on refining sector likely to make any trade & relocation impacts trivial No new refining capacity under consideration in Em bargoed until publication 2 0 Novem ber 2 0 0 7 Europe Cost of trade in refined products is much higher than crude (specialised transport and containment requirements, etc) Existing trade of refined products is largely a transatlantic swap of diesel for gasoline driven by the chemistry of crude set against intrinsic market differences
Other sectors (other than non- ferrous metals) A few individual product sectors may have high Em bargoed until publication 2 0 Novem ber 2 0 0 7 MVAS or NVAS – Chemicals very complex (seeking deeper analysis), preliminary suggests that most of the carbon- intensive products are not very amenable to international trade (e.g. as industrial gases); fertilizer the biggest potential exception – Pulp a complex issue (UK not a big player) Com petitiveness concerns for EU ETS Phase I I I can be confined to product-specific analysis of betw een 2 -5 m ain products, dom inated by cem ent, and basic iron & steel
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