Abstract
One of the central debates surrounding the design of the European Union Emissions Trading Scheme is the approach to address carbon leakage concerns. Correctly identifying the economic activities exposed to the risk of carbon leakage represents the first step in mitigating the risk effectively. This paper assesses the robustness of the quantitative assessment criteria used by the European Commission for Phase 3. For example we apply the criteria to data for UK and Germany and compare the results with the Commissions’ assessment conducted at the aggregated EU level. This reveals that sectors’ exposure risk to carbon leakage can vary across different Member States due to differences in production processes, technologies and fuel mix; process emissions; recycling rate differences; product mix differences; sector classification, statistical boundaries, activity allocation differences; and finally difference in data quality. Overall, we find that relative carbon intensity of sectors, measured as cost increase relative to gross value added, provides a robust metric. The analysis also highlights the importance of using high quality and disaggregated data for this assessment.
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Notes
Emissions leakage is a secondary or spillover effect of carbon pricing, and affects the environmental effectiveness of a unilateral carbon pricing policy. It is usually expressed in percentage terms, for example for EU’s unilateral action, dividing the increased emissions outside the EU by the decrease in emissions within the EU (see IPCC 2007).
The world’s largest \(\hbox {CO}_{2}\) market, covering around 40–45 % of EU emissions.
Directly subject to the \(\hbox {CO}_{2}\) price are some 12,000 installations covered by the scheme, usually belonging to the power iron and steel, cement, pulp and paper, glass, chemicals and refining industries.
The third indicator is a qualitative one, as specified in paragraph 17 of Article 10a.
Standard Industrial Classification is the standard reporting format for industry data. Data is readily available at high resolution disaggregation and can thus enable detailed evidence-based cross-sectoral analysis. The number of manufacturing classes increase from 23 at 2-digit resolution, to 101 at 3-digit resolution and 239 at 4-digit resolution. SIC definitions are end-product driven, however, and often do not capture distinctions between manufacturing processes and carbon intensities, for example that between BOF and EAF processes in steel. For sectors where differentiation between processes is key to competitiveness and leakage impacts, explicitly looking at examination of the production or value chain is required. In addition, some sectors are covered under different Classification (SIC) codes (e.g. Mineral Wool is defined under 26.14 for Glass Wool and 26.82 for Rock Wool).
This is estimated by BERR based on annual company reports of fuel consumption to the Annual Business Inquiry collected by the Office for National Statistics, using average price data and then scaled to the aggregate volumes reported for 12-sector figures published in Detailed UK Energy Statistics (DUKES) by BERR (2006).
The UK ONS states that “Gross value added (GVA) represents the amount that individual businesses, industries or sectors contribute to the economy. Broadly, this is measured by the income generated by the business, industry or sector less their intermediate consumption of goods and services used up in order to produce their output. GVA consists of labour costs (e.g. wages and salaries) and an operating surplus (or loss). The latter is a good approximation to profits, and out of which the cost of capital investment, financial charges and dividends to shareholders are met.” (http://www.statistics.gov.uk/abi/variable_info.asp).
For some subsectors, trade data was verified during the industry consultation period.
Here, GVA and GDP are used interchangeably. According to UK Office of National Statistics, “GVA is used in the estimation of Gross Domestic Product (GDP). GDP is a key indicator of the state of the whole economy. In the UK, three theoretical approaches are used to estimate GDP: ‘production’, ‘income’ and ‘expenditure’. When using the production or income approaches, the contribution to the economy of each industry or sector is measured using GVA.
Under the Commission’s assessment, trade intensity for sector i is defined as the sum of the value of EU-27 exports to outside the EU-27 and the value of imports from outside the EU-27 for sector i, divided by the sum of total annual turnover of sector i plus the value of imports from outside the EU-27 (see Juergens et al. 2013). As shown in Equation 4, the definition used in this paper, as it considers both the EU imports and Non-EU imports in the denominator.
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Sato, M., Neuhoff, K., Graichen, V. et al. Sectors Under Scrutiny: Evaluation of Indicators to Assess the Risk of Carbon Leakage in the UK and Germany. Environ Resource Econ 60, 99–124 (2015). https://doi.org/10.1007/s10640-014-9759-y
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DOI: https://doi.org/10.1007/s10640-014-9759-y