20080930-IEA-Climate_Policy_and_Carbon_Leakage_45页_905kb

Summary of CLIMATE POLICY AND CARBON LEAKAGE: Impacts of the European Emissions Trading Scheme on Aluminium

Core Content

This report examines the potential impact of the European Union Emissions Trading Scheme (EU ETS) on the competitiveness of the European primary aluminium sector. It addresses concerns about carbon leakage, defined as an increase in emissions outside a region due to climate policies that impose stricter emission controls within it. The report is part of a broader effort to understand the implications of climate policy on industrial competitiveness, particularly in the context of the Kyoto Protocol and the EU's approach to emissions trading.

Main Points

1. European Emissions Trading Scheme (EU ETS) Overview

• The EU ETS, introduced in 2005, caps greenhouse gas (GHG) emissions for certain sectors, including power generation and some industrial activities.
• The primary aluminium sector is not directly covered by the ETS, but it is affected indirectly through increased electricity prices, as the ETS imposes costs on power generation, which are passed through to industries.

2. Competitiveness and Carbon Leakage

• Competitiveness is defined as the ability of a sector to maintain profits and market share.
• Carbon leakage occurs when domestic climate policies lead to loss of market share or relocation of industries to countries with less stringent regulations.
• The report highlights two main channels of competitiveness-driven carbon leakage:
  • Immediate loss of market share for carbon-constrained products to non-constrained countries.
  • Relocation of energy-intensive industries to regions with more favorable climate policies.

3. Impact of EU ETS on Primary Aluminium

• The EU ETS may have triggered carbon leakage, but evidence is inconclusive.
• Since 2005, three smelters in Germany, Hungary, and France have closed, representing 6.5% of European production in 2006.
• Norway, not covered by the EU ETS, also saw smelter closures due to its own emissions trading scheme, suggesting that carbon pricing may be a broader factor.

4. Cost Analysis

• Electricity costs are a major component of production costs in the primary aluminium sector.
• Between 1999 and 2006, electricity prices in Europe increased slightly above the global average (EUR6.9/MWh vs. EUR5.6/MWh).
• However, profit margins in Europe have remained high due to global aluminium price increases (62% higher than 1998–1999 levels).

5. Trade Flows and Carbon Leakage

• Statistical analysis of 1999–2006 trade data does not confirm that EU ETS has significantly affected trade flows.
• Net imports have not shown a clear structural change, suggesting no clear evidence of carbon leakage to date.
• Long-term electricity contracts in Europe have limited the direct impact of the ETS on production costs.

6. Future Considerations

• By 2010, 65% of European smelter capacity will no longer be under long-term contracts, increasing the potential for cost increases and relocation.
• The proposed revision of the EU ETS Directive includes measures to mitigate carbon leakage:
  • Free allocation of emission allowances to sectors at risk.
  • A carbon equalisation system for imports to ensure fair competition.
• These measures may help maintain competitiveness, but their effectiveness in reducing global GHG emissions is still under debate.

Key Information

• The International Energy Agency (IEA) and OECD are key organizations in the analysis.
• Primary aluminium production is significantly more energy-intensive than recycling.
• China has become a major player in global aluminium production, with 26% of world production in 2006 and 38% increase in capacity by 2007.
• The LME and SFE set global prices for primary aluminium, limiting the ability of European producers to adjust prices independently.

Conclusion

• As of the time of the report, the European primary aluminium sector has not shown clear signs of carbon leakage.
• However, more ambitious climate policies could change this.
• The report underscores the need for robust indicators to assess the true impact of climate policy on industrial competitiveness and to ensure that measures to prevent carbon leakage are both effective and compatible with international trade rules.

Policy Questions

• How can free allocation of allowances be structured to compensate for indirect CO₂ costs?
• Should imported products be subject to the same carbon pricing mechanisms as domestic ones?
• What is the source of allowances for carbon adjustment, and how will this affect global GHG reductions?

References and Data

• The report uses 1999 and 2006 data to compare cost changes.
• Power price estimates for various regions are used to assess the impact of the EU ETS.
• Trade data from 1999–2006 is analyzed to determine if there is carbon leakage.
• Figures and tables provide detailed insights into production levels, electricity consumption, and trade flows.