IEA finds no EU ‘carbon leakage’ to date

There has so far been no sign that the EU Emissions Trading Scheme (EU ETS) has prompted industry to relocate outside of Europe, says the International Energy Agency (IEA) in a report which seeks to “demystify” the “noises” coming from sectors such as cement and steel.

Investigating heavy industry’s vulnerability to outside competition, the report finds that the first phase of the EU ETS, from 2005 to 2007, had no significant impact on the industries studied. Analysis of the steel, cement, aluminium and refining sectors revealed no immediately evident change in trade flows and production patterns.

Many industries say that the EU ETS, due to be re-launched with stricter emissions reductions criteria as of 2013, will significantly drive up manufacturing costs. Rising costs would in turn expose the EU to ‘carbon leakage’, since manufacturers of energy-intensive goods like aluminium and cement would be forced to relocate their operations and emissions outside the bloc’s borders to remain internationally competitive.

The results of the paper seek to dismiss the “noises made by a handful of sectors about competitiveness losses” by “demystifying” fears about the effects of asymmetric emission obligations.

However, IEA analyst Julia Reinaud, the author of the study, cautions that “the future form of the EU ETS may change these findings for some heavy industries, as Europe has planned more ambitious emission reduction targets post-2012”.

In addition to relocating their operations outside the EU’s borders, where producing and emitting is cheaper, European companies could seek to import carbon-intensive semi-finished products from unconstrained regions. In the long run, the regime may additionally reduce investment and thereby also production capacity, which would worsen leakage further, Reinaud points out.

The report observes that generous free allocation of allowances and the general boom in relevant product prices may explain the absence of any significant EU effects. It also warns that leakage estimates for some sectors are “imprecise and highly uncertain,” and missing entirely for others.

However, it says fears of increased global emissions as a result of carbon leakage induced by an emission cap in a country or a region are exaggerated. “It is highly unlikely that carbon leakage would wipe out entirely an effort to reduce emissions in an industry,” Reinaud argues.

The report also reviews possible measures to mitigate carbon leakage, concluding that policies will have to be tailored to specific sectors or even sub-sectors as they will require different treatment. Trade-intensity and the ability to transfer increased costs to customers are important for evaluating risks, but singling out the effects of climate policy from other factors such as economic growth remains a major challenge, the report concludes.

The current review of the EU ETS, which proposes capping emissions to 21% below 2005 levels by 2020 and enlarging the scope to new sectors, has encountered fierce opposition from certain industry sectors. They argue that without safeguards, they would be tempted to take their activities to countries where environmental regulations are less stringent (see EURACTIV LinksDossier). 

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