Effects of CO2 pricing in industry. CO2 cuts, cost-price increases and carbon leakage

In the government’s Coalition Agreement it was stated that a CO2 minimum price for power generators would be introduced in 2020, consisting of the price of a EU ETS emission allowance topped up by an additional charge. This would give a minimum price of € 18/tCO2 in 2020, rising to € 43 in 2030. In the context of policies with which the Climate Agreement can best be fleshed out, the question arises what impact it would have if this CO2 minimum price were extended to industries covered by the ETS. It was examined what impact this kind of charge would have on the most energy-intensive industries: iron and steel, petrochemicals, industrial gases, fertilizers, food, refineries and paper. In doing so, we only considered the impact of the CO2 charge on cost-price development, CO2 cuts and competitiveness.

For Dutch companies currently participating in the EU ETS, a unilateral CO2 minimum price will mean higher costs. To limit this increase in cost-price, companies will take steps to reduce their CO2 emissions (via energy efficiency, CCS, biomass). Some of the increase will be unavoidable, though, which may potentially reduce international competitiveness if charge revenues are not recycled to the industries concerned. Our calculations show that in the absence of recycling, introducing a CO2 minimum price for industry would lead to a cost-price increase varying per sector from several tenths of a percent for the food industry to 3.8% for the fertilizer industry (measured against the CO2 prices cited in the World Energy Outlook). This cost-price increase will lead to a loss of competitiveness. The overall impact is highly uncertain: at the lower end the leakage effect will be several tenths of a percent in the food industry, up to a maximum of 5% in the fertilizer industry. At the top end of the uncertainty margin, there may be far more leakage, particularly in the iron and steel industry, where it may be as much as 35%, or possibly higher.

This leakage can be substantially reduced if the CO2 pricing also leads to innovation, if the charge is attuned more to policies in neighbouring countries or if the revenues from the charge are used to reduce the energy costs of industry. A first-pass analysis indicates there is scope for increasing industrial energy or CO2 prices without loss of competitiveness, as energy-intensive industries in neighbouring countries pay more for their energy than they do in the Netherlands.