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Analysis of industry sectors exposed to Analysis of industry sectors exposed to significant risk of carbon leakagesignificant risk of carbon leakage

Results for ItalyResults for Italy

Annalisa DAnnalisa D’’Orazio, Sara FragassoOrazio, Sara Fragasso

Milan, IEFEMilan, IEFE9th March 20099th March 2009

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Outline

1. The issue2. EU Directive3. Results for Italy

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The issue

• Carbon leakage refers to an increase in carbon emissions in one country as an undirect and unilateral consequence of emissions reduction measures in another country

• Negative effects: a) cost effect: relocation of GHG emitting plants (shift in emissions); b) price effect: lose of market share in the “cleaner” country (shift in revenues)

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The issue

• Leakage is not an economic-wide problem but is specific to individual activities

• Analysis for Italian industry shows that only 1,9% of GDP is associated with activities that face significant cost increases from carbon pricing

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Evidence and Policy

• Different approaches: empirical evidence, economic models (CGE), analysis of individual sectors

• Different policy instruments: free allocation of allowance, direct compensation (State Aid), inclusion of importers of carbon intensive products in the ETS, border adjustment (direct import tariffs or carbon tax)

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Evidence and Policy

• Cooperative instruments: global sectorial deals on emissions reduction, UNFCCC negoziations

Criteria, methodology and policy instruments in EU Directive

(position of EP adopted on 17 Dec. 2008)

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EU Directive

Three sectors- Power 0%- Normal sectors: free

allowances 80% (2013) 30% (2020) 0% (2027)

- Exposed sectors:- criteria for qualifying- free allocation 100% - subject to reassessment

Key criterion: additional costs pass through

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Exposed sectorsRegulatory pathway

• Identification: 31 December 2009 (and every 5 years thereafter) – COM + EC

• Review and monitoring: 30 June 2010 (and every year thereafter) – COM + on request of a MS

• Regulation: 31 December 2010 measures for allocating the allowances referred to sectors exposed to a significant risk of CL

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Re-assessment(31 December 2010)

Adjusting the proportion of allowances received free of charge…but also…

• Inclusion in the Community scheme of importers of products produced by the sectors (alternative policy instrument)

• Assessing the impact of CL on MS’ energy security and analysis on appropriate measures to implement electricity connections (complementarity)

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Operational procedures

• All sectors starting with the same share of free allowances (100%)

• CL monitoring (annually): if a sectors see a risk of CL can annualy ask for the assessment of their indicators

• Flexibility with respect to the sectors involved and unexpected change of carbon costs and trade flows

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Key elements

View on leakage concerns: operational and investment leakage

Criteria (three categories: quantitative, qualitative, cooperative agreements)

Methodology (data, disaggregation, threshold of risk)

Policy instruments (free allocation and re-assessment)

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Quantitative criteria (art. 10a, par. 15)

A sector is deemed to be exposed to a significant risk of CL if

(a) The sum of direct and indirect additional costs induced by the implementation of the ETS directive would lead to a significant increase of production costs calculated as a proportion of the Gross Value Added, of at least 5%; and

(b) The NON-EU Trade Intensity defined as the ratio between total exports to non EU + imports from non EU and the total market size (annual turnover + total imports) is above 10%

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Qualitative criteria(art. 10a, par. 16)

• The extent to which it is possible for individual installation in the sector concerned to reduce emissions levels or electricity consumption, including the increase in cost of production that the related investment may entail (ex on the base of the most efficient techniques)

• Market characteristics (current and projected)• Profit margins as potential indicator of long-run

investment and/or relocation decisions

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Cooperative criteria(art. 10a, par. 17)

• The list of sectors and subsectors exposed to a significant risk of CL shall be determined after taking into account the extent to which third countries firmly commit to reducing GHG emissions in the relevant sectors and within the same time frame to an extent comparable to that of the EU and the extent to which carbon efficiency of installations located in these countries is comparable to that of the EU

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Methodology (partial)

• Starting point: 3-digit level or, where the relevant data are available, at a 4-digit level (NACE code)

• Data: three most recent year (2004, 2005, 2006)

• Indicator 1=Industry additional costs relative to product prices, related to CO2 emissions 5%

and • Indicator 2=Openess to international trade and

exposure to international competition 10%

• 30% if Indicator 1 or Indicator 2

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Italy

Defining the sectors (data collection)Measuring the impact in terms of potential product price increase (indicator 1)Measuring the exposure to international trade (indicator 2)Other criteria

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Data

Dataset1) Emissions (UNFCCC, EPER) 2) Electricity consumptions (Terna, Istat)3) VA, Turnover (Istat)4) International trade (Istat, UN Comtrade)Pricea) EUA price: our estimate b) Additional electricity price: our estimate

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The Italian Manufacturing

ELECTRICAL AND OPTICAL EQUIPMENT

9,6%

CHEMICAL 7,6%

IRON AND STEEL 3,2%

RUBBER AND PLASTIC PRODUCTS

4,7%

WOOD AND FORNITURE

5,7%

NON-METALLIC MINERAL PRODUCTS

5,9%

NON-FERROUS METALS

1,2% OTHER INDUSTRIES15,3%

TRANSPORT EQUIPMENT

6,2%PAPER AND PRINTING

6,3%

FOOD AND BEVERAGE9,8%

TEXTILE, LEATHER AND CLOTHING

10,3%

MACHINERY AND EQUIPMENT

14,3%

Composition of Value added by Sectors

Source: IEFE processing

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12

14

16

18

20

22

24

26

28

30

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Germany

Italy

EU-15

Spain

UnitedStatesFrance

Manufacturingin Advanced Economies

Value added in % of GDP

Source: IEFE processing

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Direct and indirect emissions

Emissions intensive sectors• Cement (non metallic

mineral production)• Organic basic chemicals

(chemicals)• Lime (non metallic) • Flat glass (non metallic)• Basic iron (iron and steel)• Inorganic basic chemicals

(chemicals)• Non ferrous metals

Electricity intensive sectors• Basic iron and steel• Cement• Lime• Alluminium (non ferrous

metals)• Glass and glass products• Flat glass• Organic basic chemicals

Made in Italy: machinery and equip., wood production, motor vehicles, textilesNACE code: 3 digit and if available 4 digit

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Carbon costs

Direct: full transferEUA price 22 €/tonCO2 Undirect: full pass through of additional cost to electricity price Additional price: 14,8 €/tCO2

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Carbon margin contribution

C-Cost intensity=C-Costs in Value Added

Indicator 1 by sectors

0% 2% 4% 6% 8% 10% 12%

iron and steel

non metallic mineral products

non ferrous metals

paper and printing

food and beverage

chemical

machinery and equipment

textile, leather and clothing

electrical and optical equipment

transport equipment

wood and forniture

rubber and plastic products

Source: IEFE processing

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Carbon margin contribution

Indicator 1 by sub sectors

0% 10% 20% 30% 40% 50% 60% 70%

basic iron and steel and ferro-alloystubes

glass and glass productsflat glass

ceramic and construction productscement

limepaper

food inorganic basic chemicals

organic basic chemicalsaluminium production

machinery and equipmenttextile, leather and clothing

motor vehicles, parts and accessorieswood and products of woodrubber and plastic products

Source: IEFE processing

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Impact on production and competitiveness

Trade intensityRelocation of production from existing installation(inter trade non ETSwith respect to total market size)

Export competition (exports to non ETS countries)

Import competition(imports from non ETS countries)

Indicator 2

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International competition exposure

0,00% 5,00% 10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

40,00%

iron and steel

non metallic mineral products

non ferrous metals

paper and printing

food and beverage

chemical

machinery and equipment

textile, leather and clothing

electrical and optical equipment

transport equipment

wood and forniture

rubber and plastic products

Indicator 2 by sectors

Source: IEFE processing

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International competition exposure

0,00% 5,00% 10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

40,00%

basic iron and steel and ferro-alloys

glass and glass products

ceramic and construction products

lime

food

organic basic chemicals

machinery and equipment

motor vehicles, parts and accessories

rubber and plastic products

Indicator 2 by sub sectors

Source: IEFE processing

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...BY SECTORS

0%

5%

10%

15%

20%

25%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

carbon margin contribution

com

petit

ion

expo

sure

rubber and plastic products

wood and forniture

paper and printingfood and beverage

---

textile, leather and clothingmachinery and equipment

chemicalelectrical and optical equipment

non- ferrous metals

transport equipment

non- metallic mineral products

iron and steel

- - - - - - - - - - - -

Some results …

Source: IEFE processing

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...BY SUB-SECTORS

0%

5%

10%

15%

20%

25%

30%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

carbon margin contribution

com

petit

ion

expo

sure

textile, leather and clothingmachinery and equipment

rubber and plastic productsmotor vehicles, parts and accessories

wood and products of woodfood and beveragepaper and printing

tubes

ceramic and construction products

electrical and optical equipment alluminium production

organic basic chemicals

glass and glass products

45%

cement

lime

basic iron and steel and ferro-alloys

inorganic basic chemicals

flat glass

- - - 15% - - - - - -

Some results …

Source: IEFE processing

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Other criteria

Operational leakage(existing installations)

- Different assessment in I-IV categories- less capital intensive sectors- market phases: high surplus capacities- No additional investments to relocate

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Other criteria

Investment leakage(new, extention production, re-investment)

Expectation on a sufficient period of timeBoth high capital intensive and low capital intensive No structural and system barriers: transport costs, currency and regulatory risks, finance costs)Investment leakage can be avoided if the compensation measures can be guaranteed for a long period of time into the future