Impacts on Competitiveness from EU ETS, an analysis of the Dutch Industry

The EU emissions trading scheme (ETS) was launched in 2005 to cap CO2 emissions from large industrial facilities and electricity producers. The European Commission is currently designing the post 2012 EU ETS, as outlined in COM(2008)16. Novel to this system is that a greater part of the rights will be auctioned. Auctioning in general assures a greater deal of efficiency compared to (certain types of) free allocation, lowers the administrative costs and prevents eventual windfall profits. However, auctioning also implies a potential loss of competitiveness for industry. If no international agreement on future climate policies is reached, firms may not be able to pass on the higher costs to their customers and may be faced with a loss in profitability and the threat of import substitution. In any emission trading scheme with an absolute cap, a relocation of production that is not covered by CO2 targets implies an increase in global CO2 emissions. This phenomenon has been labelled as ‘carbon leakage’. To prevent carbon leakage, the Commission has proposed to exempt exposed sectors from auctioning and allocating them rights freely on the basis of a benchmark. A severe loss of competitiveness is here the main criterion against which it is decided whether sectors will be subject to auctioning or free allocation. This study has investigated which industrial sectors of the Dutch economy possibly face a loss of competitiveness from auctioning. The competitive position is determined by the combination of significant potential cost price increases and substantial imports and export flows to countries that have no comparable climate change policy. It appears that especially in the aluminium, fertilizer, iron and steel , inorganic and other base chemicals sectors relatively high cost price increases can be expected which may not be fully passed on to their customers. Profitability in these sectors may be reduced and the risk of carbon leakage increased. However, in terms of impacts on the national economy (i.e. GDP) the effects are probably small. The direct costs of EU ETS are 0,2% of GDP (for an emission price of €20/ton CO2) of which about half can be passed on to the customers. Impacts on the competitive position may occur in the vulnerable sectors but these sectors are in general the smaller sectors of the Dutch economy – with the exception of the iron and steel industry (in total 1,1% of GDP). In addition, if international climate policy until the year 2020 will result in more countries agreeing on binding reduction targets, impacts on competitiveness will be smaller than analyzed here.