In the discussion on the potential risk of carbon leakage related to the EU ETS and the effect of safeguard measures, the scope for passing through carbon costs in final product prices is deemed a key issue. This study investigates whether and to what extent ETS-related carbon costs have indeed been passed through into product prices by EU industry. It further analyses the factors that may have influenced such pass-through. The study approaches cost pass-through from different angles:
- a detailed literature review (theoretical, ex-ante modelling and ex-post empirical studies)
- econometric estimates for a number of products in six sectors in different countries
- a qualitative and quantitative analysis of potential factors explaining ability or inability to pass through carbon costs.
In line with the literature, our econometric results show that significant cost pass-through could be observed for a number of products, in particular in the cement, iron & steel and refineries sectors, with the actual rates of pass-through diverging. Market power both within the EU and in international markets, including bargaining power, and exposure to international competition seem to be among the main driving forces of both price formation processes and the ability to pass through carbon costs.