Trade Exposure of Energy Intensive Sectors

This report analyses the source and destination of trade flows between EU and non-EU countries with respect to eight industrial sectors, combining these insights with an analysis of the political pledges made during the Copenhagen negotiations last December to assess the risk of carbon leakage due to EU climate policies. Our analysis shows that much of EU trade is with countries that already have climate policies in place. As these major trading partners can be expected to adopt similarly stringent climate policies to the EU, carbon emissions may be assigned a price in these markets, too, thus reducing or eliminating the risk of carbon leakage. This should be duly corrected for in trade intensities.

If the EU adopts a 30% emission reduction target, trade with Australia, New Zealand, Japan, Switzerland, Brazil and Mexico will need to be excluded from the calculation of trade intensities, as these countries will adopt comparable climate policies. The average downward correction of trade intensities is then 3%. If the EU eventually decides to adopt a 20% reduction scenario, trade flows with Russia, Canada and the USA should also be excluded, as these countries will then have policies of similar stringency. In that case the average downward correction of trade intensities is 8.5%.

These findings have direct consequences for the allocation mechanism for certain sectors which will then no longer receive free emission allowances as they no longer qualify for being ‘exposed’ to international competition. A list of sectors is provided in the report. At the same time, though, those sectors that are expected to face large cost increases (>5%) as a result of the EU ETS will still be eligible for free allocation.