Trade flows and costs passed throughAs two critical elements of carbon leakage

Sander de Bruynbruyn@ce.nl

2Sander de Bruyn/18 November 2009

Carbon Leakage Foundation

1. There is trade with non-EU countries where carbon has no price until 2020 so that exports from EU to these countries will diminish and imports from these countries will grow, resulting in carbon leakage.

2. To protect the world from carbon leakage (and EU industries from costs), EUAs are better allocated for free.

3. Companies prone to carbon leakage cannot pass through the costs of EUAs anyway, so windfall profits are not an issue.

4. Environmental effectiveness stay the same under free allocation, so climate policy of EU is guaranteed.

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Free allocation or auctioning

Environmental impact in 2020 within the EU: Stays the same (-21%).

Cost allocation differs: With auctioning costs are largely paid by companies, with free allocation costs are largely paid by consumers

Risks differ: Auctioning gives risks of carbon leakage, free allocation gives risks of windfall profits energy-intensive companies and shifting the burden of costs to labour intensive industries.

Economic efficiency differs: Auctioning is more efficient resulting in a lower EUA price

Environmental impacts long term differ: A lower EUA price gives more stimulus to more stringent targets and hence auctioning gives a better signal for LT climate policies.

Hence the claim that environmental effectiveness is similar is not true in the long-run.

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Are all non-EU countries potential places of CL? Carbon leakage discussion assumes that only EU industries are

under climate policies in 2020. However, under a new treaty more countries are likely to accept

binding targets. For imports and exports to these countries costs may be just

passed onto the consumers.

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Set up

Analyzing trade flows and cost patterns between EU and non-EU markets for:

Steel Products from refineries; Chemicals (Chlorine/PVC); Cement Other products

Analyzing the trade intensity: ({import + export}/{productie + import}

CL: trade intensity >30% (or trade intensity >10% and costs/GVA>5%).

For 2005-2008 we will observe price differences in CO2 markets, EU price and non-EU price for (some of these) commodities).

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Refineries: imports

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Refineries: exports

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Steel and steel products: imports

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Steel and steel products: exports

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Chemical sector: imports of chlorine

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Chemical sector: imports of PVC

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Chemical sector: exports of PVC

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Chemical sector: PVC cost pass through?

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

5

10

15

20

25

30

35

PVC EU/ US

prij sCO2

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Conclusions

EU net exporter of energy-intensive products. Some of the costs of energy-intensive products have probably

been passed through in the product prices, though scientific evidence is sometimes difficult to obtain using econometric analysis.

Large share of the exports and imports come from Annex B countries that, in 2020, will have their own climate change policies. Therefore windfall profits might even increase in 2020 compared to now.

Thank you for your attentionSander de BruynCE Delftbruyn@ce.nl