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Industrial competitiveness impacts of the EU ETS
EU ETS Review Seminar, Stockholm, 11 Oct 2007
Professor Michael Grubb Chief Economist, the Carbon Trust and Director, Climate Strategies
Senior Research Associate, Faculty of Economics, Cambridge UniversityAnd Visiting Professor, Imperial College
Drawing on research convened by
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Karsten Neuhoff, Misato Sato and Michael GrubbEPRG, Faculty of Economics, Cambridge
Convened by:
Faculty of economics
Jean-Charles Hourcade & Damien Demailly, CIRED, Paris
Additional contributions from:Felix Matthes, Oeko-Institute, Berlin and Joachim Eichammer, Fraunhofer ISI Karlsruhe
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Competitiveness is a sector/product issueAt aggregate sector level (using 3 digit (Standard Industrial Classification 92), energy and metals production stand out
Textiles
Food & tobacco
Pulp, Paper, Printing &Publishing
Coke oven, refined petroleum &
nuclear fuel
Chemicals
Cement,lime&
plaster
Basic Metals (incl. Iron & Steel)
Wood
Electricity
Plastic & rubber
Glass & Ceramics
Non-Ferrous Metals
Fabricated metal
Machinery Electrical & optical equipment
Transport equip.0%
5%
10%
15%
20%
0% 10% 20% 30% 40% 50%UK trade intensity from Non-EU
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke
MVAS: Max.GVA at stake (no free allocation)
NVAS: Net GVA at stake (100% free allocation; exposure to electricity price only)
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/mwh
Vertical range gives insights on:- Marginal cost increase (top end of bar)
-Impact of electricity price pass through
(bottom end of bar)
Combined with horizontal axis gives insights on: - possible dynamics of impacts- Scope for auctioning?
Note: Process emissions and onsite emissions included
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.. And trade intensity within EU is bigger than international trade intensity even for the UK
Textiles
Food & tobacco
Pulp, Paper, Printing & Publishing
Coke oven, refined petroleum
& nuclear fuel
Chemicals
Cement,lime&
plaster
Basic Metals (incl. Iron & Steel)
Wood
Electricity
Plastic & Rubber
Glass & Ceramics
Non-Ferrous Metals
Fabricated metal
Machinery
Electrical & optical
equipment
Transport equipment
0%
5%
10%
15%
20%
0% 10% 20% 30% 40% 50% 60%UK trade intensity from within the EU
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke
MVAS: Max.GVA at stake (no free allocation)
NVAS: Net GVA at stake (100% free allocation; exposure to electricity price only)
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/mwh
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Subsector analysis
(4-digit SIC code level)
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‘Construction’ sector: cement production dominatesemissions, high MVAS, relatively low NVAS, accountsfor c.10% of aggregated sector value-added
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
5%
10%
15%
20%
25%
30%
35%
0% 20% 40% 60% 80% 100%Non- EU Trade Intensity
Pot
entia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VA
S/ N
VA
S)
Man. of cement
Man. of concrete productsfor construction purposes
Man. of plaster products forconstruction purposes
Man. of ready0mixedconcrete
Man. of other articles ofconcrete, plaster andcement
Cutting, shaping andfinishing of stone
Production of abrasiveproducts
Man. of other non0metallic.mineral products n.e.c
Man. of lime
Manufacture of cement(SIC 26.51); GVA £409million (2004)
Total sector GVAin 2004
£3,359 million
Manufacture of lime (SIC 26.52); GVA £26 million (average 1997-1999)MVAS 126%
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Iron and Steel: Basic Iron & Steel production (blast furnace) dominates emissions, MVAS c.25%, c.10xNVAS, accounts for half sector value-added
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
5%
10%
15%
20%
25%
30%
0% 20% 40% 60% 80% 100%Non-EU Trade Intensity
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VAS/
NVA
S)
&Man.of basic ironsteel and of)ferro0alloys (ECSC
Man. of cast iron tubes
Man. of steel tubes
Cold draw ing
Cold rolling of narrowstrip
Cold forming or folding
Wire draw ing
Casting of iron
Casting of steel
Manufacturing of basic iron and steel (SIC 27.10); GVA £1,064million (2004) MVAS 27%.
Total Sector GVA in 2004
£2,139 million
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Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWhh
0%
2%
4%
6%
8%
10%
12%
0% 20% 40% 60% 80% 100%Non-EU Trade Intensity
Manufacturing of refined petroleum (SIC 23.20);GVA £2,300 million (2005)*
Pot
entia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VA
S/ N
VA
S)
Total sectoral GVA
for 2004£2,627 million
Manufacturing of coke oven products (SIC 23.10); GVA £10 million (average of 1998- 2002).
Energy processing dominated by refineries
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Other sectors tend to more complex substructure with more product diversity & lower carbon intensity of most processes
Food, beverage tobaccoTextiles & leatherWood, paper and pulpChemicalsPlastics and rubberGlass and ceramicsNon-ferrous metals (high electricity intensity)
Total of 159 product categories examined
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Pote
ntia
l max
imum
gro
ss v
alue
add
ed a
t sta
ke (M
VAS
)an
d ne
t gro
ss v
alue
add
ed a
t sta
ke (N
VAS)
Cem
ent
Basi
c iro
n &
stee
lLime
Fertilisers & Nitrogen
Alu
min
ium
Other inorganicbasic chemicals
Pulp &Paper
MaltCoke oven
Industrial gasesNon-wovens
Refined petroleum
Household paper
Hollow glass
Finishing of textiles
Rubber tiers & tubes
CopperCasting of iron
UK GDP
Allocation dependent (direct) CO2 costs / GVAElectricity (indirect) CO2 costs / GVA
Price increase assumption: CO2 = €20/t CO2; Electricity = €10/MWh
Flat glassVeneer sheets
0%
10%
20%
30%
40%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0%
4%2%Po
tent
ial m
axim
um g
ross
val
ue a
dded
at s
take
(MVA
S)
and
net g
ross
val
ue a
dded
at s
take
(NVA
S)
Cem
ent
Basi
c iro
n &
stee
lLime
Fertilisers & Nitrogen
Alu
min
ium
Other inorganicbasic chemicals
Pulp &Paper
MaltCoke oven
Industrial gasesNon-wovens
Refined petroleum
Household paper
Hollow glass
Finishing of textiles
Rubber tiers & tubes
CopperCasting of iron
UK GDP
Allocation dependent (direct) CO2 costs / GVAElectricity (indirect) CO2 costs / GVA
Price increase assumption: CO2 = €20/t CO2; Electricity = €10/MWh
Flat glassVeneer sheets
0%
10%
20%
30%
40%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0%
4%2%
CO2 cost screen: Sectors potentially exposed under unilateral CO2 pricing
Hourcade et.al. Differentiation and dynamics of EU ETS industrial competitiveness impacts.
Cement & BOS steel stand out, in total, 23 product categories representing c.1% of UK GDP have MVAS>4% or NVAS>2% at €20/tCO2
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Intepretation of subsectoranalysis
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Cement and Basic Iron and Steel
MVAS in the range 25-35% of total value added implies EU ETS will have significant impact on sector economicsNVAS of c.2% (cement) – 3.5% (steel) implies that 100% free allocation will keep the gross cost impact “within the noise” compared to other temporal and geographical influences on costsBoth have carbon-intensive intermediate product: clinker (for cement), coke (for steel)With fixed allocation:– Huge tension in pricing decisions between short-run profit
maximisation, and long-run market share protection– Strong incentive for leakage: import the finished or
intermediate product, and sell the surplus allowances
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Constraints on refining sector likely to make any trade & relocation impacts trivial
No new refining capacity under consideration in EuropeCost of trade in refined products is much higher than crude (specialised transport and containment requirements, etc) Existing trade of refined products is largely a transatlantic swap of diesel for gasoline driven by the chemistry of crude set against intrinsic market differences
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Other sectors (other than non-ferrous metals)
A few individual product sectors may have high MVAS or NVAS– Chemicals very complex (seeking deeper analysis),
preliminary suggests that most of the carbon-intensive products are not very amenable to international trade (e.g. as industrial gases); fertilizer the biggest potential exception
– Pulp a complex issue (UK not a big player)
Competitiveness concerns for EU ETS Phase III can be confined to product-specific analysis of between 2-5 main products, dominated by cement, and basic iron & steel
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Deeper Dive
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Some principles for addressing leakage and competitiveness concerns
Focus on sector specifics not generalised solutionsFocus on leakage, not competitiveness per se:– Much sharper focus on EU ETS-related impacts
rather than generalised pleas for protection– Aligns environmental with economic concerns
For the period 2012-2020, acknowledge case for concern in cement and BOS Steel, that may be (imperfectly) addressed through free allocation if other avenues are not developedOther key sectors (mainly basic chemicals, pulp&paper, refining) should be monitored for evidence-basedassessments of impacts, not driven by projectionsPolitical judgement may be needed on whether to trouble for a few other specific subsectors/products, that are macroeconomically trivial (<< 0.1% GDP)
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Cement already faces widely divergent domesticprices
Climate Strategies – IDDRI Meeting13th September 2007
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.. So analysis of potential EU ETS trade impacts needs needs to understand the intrinsic trade barriers (& drivers)
Climate Strategies – IDDRI Meeting13th September 2007
Road cost, sea cost, storage facility
Anti-competitive behaviours.
Balance on the markets abroad (& domestic)
Risk: retaliation, market immaturity…
Colour, strenght, workability, consistency…
Availability, vertical integration, price stability…
International Pressure on EU market
Diff
eren
cein
ope
ratin
g co
sts
betw
een
the
EU a
nd th
e R
oW
Transport
Consumption / Capacity
Import restriction
Cost of instability
Product differentiation
Service differentiation
Trad
e B
arrie
rs
NB: Barriers are lower for EU transnational firms
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What about relocation?
Climate Strategies – IDDRI Meeting13th September 2007
Currently, there are no (few) export capacities.
15
25
35
45
55
10
15
20
25
30
35
South East Asia-US Gulf Handymax Transatlantic US East Coast-US Gulf Handysize
Freigth Rates in $/to : Asia to USA
Freigth Rates in $/to : Europe to USA
Asian route Spot rate is 34$/t above historical
average of 17$/tEuropean route Spot rate is 18$/t above historical average
of 12$/t
20042003200220012000Source: Exane
$/t cement
15
25
35
45
55
10
15
20
25
30
35
South East Asia-US Gulf Handymax Transatlantic US East Coast-US Gulf Handysize
Freigth Rates in $/to : Asia to USA
Freigth Rates in $/to : Europe to USA
Asian route Spot rate is 34$/t above historical
average of 17$/tEuropean route Spot rate is 18$/t above historical average
of 12$/t
20042003200220012000
15
25
35
45
55
10
15
20
25
30
35
South East Asia-US Gulf Handymax Transatlantic US East Coast-US Gulf Handysize
Freigth Rates in $/to : Asia to USA
Freigth Rates in $/to : Europe to USA
Asian route Spot rate is 34$/t above historical
average of 17$/tEuropean route Spot rate is 18$/t above historical average
of 12$/t
20042003200220012000Source: Exane
$/t cementCement sea costs
Euro exchange rate vs US Dollars
60
70
80
90
100
110
120
janv-93
janv-94
janv-95
janv-96
janv-97
janv-98
janv-99
janv-00
janv-01
janv-02
janv-03
janv-04
janv-05
janv-06
janv-07
Is the picture changing? Some EU firms are considering the relocation of part of their activity.
Relocation barriers≈
trade barriers+
an important « cost of instability »
New long run investments, made sensitive tofluctuations in tariffs (see export taxes in Turkeyor China in 2007), exchange rates, or transport costs.
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Industrial competitiveness impacts of the EU ETS
EU ETS Review Seminar, Stockholm, 11 Oct 2007
Steel sector analysis
Drawing on research convened by
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A world market fragmented?Confirmation by trade data
Climate Strategies – IDDRI Meeting13th September 2007
The world market appears fragmented into regional markets partially interconnected through price.
0
20
40
60
80
100
120
140
160
180
EUROPE EUROPE AMERICA AMERICA ASIA ASIA
Export to Import from Export to Import from Export to Import from
MT
OthersASIAAMERICAEUROPE
Steel trade across Regions
Source: IISI (2007)
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Trade barriers in steel
Climate Strategies – IDDRI Meeting13th September 2007
International Pressure on EU market
Diff
eren
cein
ope
ratin
g co
sts
betw
een
the
EU a
nd th
e R
oW
Transport
Consumption / Capacity
Import restrictionCost of instability
Product differentiation
Service differentiation
Trad
e B
arrie
rs
Import and export tariffs, standards
Proximity with consumers, different stages of tech developments…
Just in time delivery, technical assistance…
Balance on the markets abroad (& domestic)
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Future Challenges
Climate Strategies – IDDRI Meeting13th September 2007
1. Does the 2006 surge in imports signal the start of a continuous decline of trade barriers? Further analysis would be required as part of this rise may beattributed to:
• The apparition of (transitory) excess capacities abroad, notably in China. • The EU rise in consumption (+10% between 2005 and 2006), especially in Italy.
2. Internationalisation of firms: better ability of taking advantage of cost differences Relocation?
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Steel: Relocation issues
Climate Strategies – IDDRI Meeting13th September 2007
Nowadays most of steel plants are built to supply the local markets.
The sustainability of this situation is not guaranteed for BOF semis: high cost differences across countries, relatively low product differentiation.
What scale of relocation for BF semis? Controversial. Relocation barriers:
• Social viscosity, sunk costs and current boom slow down process;• Semis are differentiated products;• Countries are reluctant to host export plants; • The production chain is made sensitive to risks.
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Industrial competitiveness impacts of the EU ETS
EU ETS Review Seminar, Stockholm, 11 Oct 2007
Modeling analysis of impacts on steel and cement
Drawing on research convened by
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Sector impacts: modeling analysis (cement and steel)
Climate Strategies – IDDRI Meeting13th September 2007
Three cost increase:
• The electricity cost increase due to the rise in electricity prices;
• The abatement cost due to the efforts made to reduce the unitary emissions;
• The emission cost: depends on the allocation methodology and the behaviour of firms vis-à-vis the opportunity cost of free allowances.
Three extreme scenarios for the allocation methodology:
• Full auctioning (labelled AU);
• Full free allowances with opportunity cost (Free Eco)
• Full free allowances without opportunity cost (Free Ind)
Three CO2 prices tested: 15 (Phase 2 expectations), 30 and 45€/t.
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Cost ImpactFrom the modelling work
Climate Strategies – IDDRI Meeting13th September 2007
CO2 price (€/t)
Cos
tinc
reas
e(€
/t)
15 30 45
10
20
30
40
Costincrease
(%)
20
40
60
Auction or Free Eco
Free Ind
ElectricityAbatementEmission
CO2 price (€/t)
Cos
tinc
reas
e(€
/t)
15 30 45
10
20
30
40
Costincrease
(%)
20
40
60
Auction or Free Eco
Free Ind
ElectricityAbatementEmission
EU ETS impact on average EU cement costs
• The emission cost dominatesunder AU or Free Eco
• The cost impact is very high.
• Under Free Ind, the emissioncost is positive (we assume a 10% emission reduction target) and non negligible.
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Cost ImpactFrom the modelling work
Climate Strategies – IDDRI Meeting13th September 2007
CO2 price (€/t)
Cos
tinc
reas
e(€
/t)
15 30 45
20
60
Costincrease
(%)
5
10
15ElectricityAbatement
Auction or Free Eco
Free Ind
Emission
40
CO2 price (€/t)
Cos
tinc
reas
e(€
/t)
15 30 45
20
60
Costincrease
(%)
5
10
15ElectricityAbatement
Auction or Free Eco
Free Ind
Emission
40
EU ETS impact on average BOF steel costs
• The emission cost dominatesunder AU or Free Eco
• The cost impact is high.
• Under Free Ind, the emissioncost is negative. The overall cost isnegligible.
We focus on BOF as EAF is identified as much less sensitive:• Generally less exposed to international competition;• Relatively low CO2 intensity.
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Industrial competitiveness impacts of the EU ETS
EU ETS Review Seminar, Stockholm, 11 Oct 2007
SUPPORTING MATERIAL
Drawing on research convened by
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Subsector analysis
(4-digit SIC code level)
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4 digit: Food, Beverage and Tobacco
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/mwh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 20% 40% 60% 80% 100%Non - EU Trade Intensity
Pot
entia
l max
imum
and
net
gro
ss v
alue
add
ed a
tst
ake
(MV
AS
/ NV
AS
)
P roduction and preserving of meat
Production and preserving of poultrymeatProduction of meat and poultrymeat products
Processing and preserving of fish and fish productsProcessing and preserving of potatoes
M an. o f fruit and vegetable juice.Processing and preserving of fruit and vegetables n.e.c
M an. o f crude o ils and fats
M an. o f refined o ils and fatsM an. o f margarine and similar edible fatsOperation of dairies and cheese making
M an. o f ice creamM an. o f grain mill products
M an. o f starches and starch productsM an. o f prepared feeds for farm animals
M an. o f prepared pet foodsM an. o f bread; fresh pastry goods and cakes
M an. o f rusks and biscuits; preserved pastry goods and cakesM an. o f cocoa; chocolate and sugar confectioneryProcessing of tea and coffee
M an. o f condiments and seasonings
.M an. o f o ther food products n.e.cM an. o f distilled potable alcoholic beverages
M an. o f beerM an. o f malt
Production of mineral waters and soft drinksM an. o f tobacco products
Total Sector GVA for 2004
£22,516million
Manufacturing of malt (SIC15.97);GVA £64million (2004)
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4 digit: Textiles and Leather
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 20% 40% 60% 80% 100%
Non-EU Trade Intensity
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
edat
sta
ke (M
VAS/
NVA
S)
P reparation & spinning of worsted0type fibres
Preparation & spinning of flax0type fibres
Throwing,preparation&texture of silk,synthetic/artificial filament yarn
M an. o f sewing threads
Cotton0type weaving
Woollen0type weaving
Worsted0type weaving
Silk0type weaving
Other textile weaving
Finishing of textiles
M an. o f made0up textile articles, except apparel
M an. o f carpets and rugs
M an. o f cordage, rope, twine and netting
M an.of non0wovens& articles made from non0wovens except apparel
.M an. o f o ther textiles n.e.c
M an. o f knitted and crocheted hosiery
M an. o f leather clo thes
M an. o f workwear
M an. o f o ther outerwear
M an. o f underwear
.M an. o f o ther wearing apparel and accessories n.e.c
Dressing &dyeing of fur; man. o f articles of fur
Tanning and dressing of leather
M an. o f luggage, handbags and the like, saddlery& harness
Finishing of textiles(SIC 17.30)GVA £230million (2004)
Total sector GVA in 2004
£4,150 million
Manufacturing of non-wovens; (SIC 17.53)GVA £45million (2004)
Other textile weaving (SIC 17.25)GVA £6million (2004)
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4 digit Wood, Paper and Pulp
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 20% 40% 60% 80% 100%Non-EU Trade Intensity
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VAS/
NVA
S)
Saw milling & planing of w ood; impregnation ofw ood,Man.of veneer sheets,plyw ood, laminboardparticle board, f ibre board etcMan. of builders' carpentry and joinery
Man. of w ooden containers
Man. of other products of w ood
Man. of articles of cork, straw and plaitingmaterialsMan. of pulp, paper and paperboard
Man.of corrugated paper, paperboard, containers
Man.of household and sanitary goods & of toiletrequisitesMan. of paper stationery
Man. of w allpaper
.Man.of other articles of paper & paperboard n.e.c
Publish. books
Publish. new spapers
Publish. journals and periodicals
Publish. sound recordings
Other publishing
.Printing n.e.c
Composition and plate0making
Total Sector GVA for 2004
£22,428million
Manufacturing of pulp, paper and paper borad (SIC 2111 and 2112); GVA £788 million, (2004)
Manufacturing of household sanitary goods (SIC 21.22); GVA £554 million (2004).
Manufacturing of veneer sheets, plywood etc. (SIC 2020); GVA £275 million (2004)
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4 digit Chemicals
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
0% 20% 40% 60% 80% 100%NON EU trade Intensity
Pot
entia
l val
ue a
t sta
ke (G
VAS
/ M
VA
Sun
der 0
to 1
00%
free
allo
catio
n
M an. o f fertilizers and nitrogencompounds
M an. of o ther organic basic chemicals
M an. of o ther inorganic basic chemicals
M an. of dyes and pigments
M an. of industrial gases
M an. of plastics in primary forms
M an. of synthetic rubber in primary forms
M an. of pesticides and o theragro0chemical productsM an. of paints,varnishes, similarcoatings, printing ink and mastics
M an. of basic pharmaceutical products
M an. of pharmaceutical preparations
M an. of perfumes and to ilet preparations
M an. of explosives
M an. of glues and gelatines
M an. of essential o ils
M an. of photographic chemical material
M an. of prepared unrecorded media
.M an. of o ther chemical products n.e.c
M an. of man0made fibres
M an. of soap and detergents, cleaningand polishing preparations
Manufacturing of fertilisers and nitrogen compounds (SIC 24.15);GVA £169 million (2004)
Total Sectoral GVA in 2004
£16,060 million
Manufacturing of inorganic basic chemicals (SIC 24.13);GVA £393million (2004)
Manufacturing of industrial gases (SIC 24.11);GVA £450million (2001)
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4 digit Plastic and Rubber
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 20% 40% 60% 80% 100%
Non-EU trade Intensity
Pote
ntia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VAS/
NVA
S)
Manufacture of rubbertyres and tubes
Retreading and rebuildingof rubber tyres
Manufacture of otherrubber products
Manufacture of plasticplates, sheets, tubes andprofilesManufacture of otherplastic products
Manufacture of plasticpacking goods
'Manufacture of buildersw are of plastic
Total Sectoral GVA in 2004
£7,842 million
Manufacturing of rubber tyres and tubes (SIC 25.11); GVA £562 million (2004)
Retreading and rebuilding of rubber tyres (SIC 25.12); GVA £29 million (2004)
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4 digit Glass and Ceramics
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 20% 40% 60% 80% 100%Non- EU Trade Intensity
Pot
entia
l max
imum
and
net
gro
ss v
alue
add
ed a
t sta
ke (M
VA
S/ N
VA
S)
M anufacture of flat glass
Shaping and processing of flat glass
M anufacture of ho llow glass
M anufacture of glass fibres
M anufacture and processing of o therglass, including technical glassware
M anufacture of ceramic household andornamental articles
M anufacture of ceramic sanitary fixtures
M anufacture of o ther ceramic products
M anufacture of refractory ceramicproducts
M anufacture of ceramic tiles and flags
M anufacture of bricks, tiles andconstruction products, in baked clay
M anufacture of o ther technical ceramicproducts
Total sector GVA in 2004
£2,451 million
Manufacture of hollow glass (SIC 26.13);GVA £329 million (2002 data)
Manufacture of flat glass (SIC 26.11);GVA £159 million (2002 data)
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4 digit Non-Ferrous Metals
Assumptions: CO2 price=€20/tCO2; Pass through in electricity = €10/MWh
0%
2%
4%
6%
8%
10%
0% 20% 40% 60% 80% 100%Non-EU Trade Intensity
Pot
entia
l val
ue a
t sta
ke (G
VA
S /
MV
ASun
der 0
to 1
00%
free
allo
catio
n
Precious metalsproduction
Aluminiumproduction
Lead, zinc andtin production
Copperproduction
Othernon0ferrousmetal production
Total Sector GVA in 2004
£1,309 millionAluminium production (SIC 27.42); GVA £444 million (2004)
Copper production (SIC 27.44); GVA £131 million (2004)
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Supporting material:
UK-EU comparators
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0%
5%
10%
15%
20%
25%E
U 2
7
Uni
ted
Kin
gdom
Bel
gium
Bul
garia
Cze
ch R
epub
lic
Den
mar
k
Ger
man
y
Est
onia
Irela
nd
Spa
in
Fran
ce Italy
Cyp
rus
Latv
ia
Hun
gary
Net
herla
nds
Aus
tria
Pol
and
Por
tuga
l
Rom
ania
Sec
tor s
hare
of n
atio
nal G
VA
Metal
Basic Metal
Cement
Plastic
Chemicals
Refining
Publishing
Paper
Wood
Textile
Tobacco
Food
Figure 30 Share of sectors analysed in this chapter of the GDP of EU countries
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Trade intensity of top 23 sectors with Non-EU and EU countries in UK and Germany
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
Casting services of iron
Throwing, preparation & texture of silk,filament yarn
Copper production
Other textile weaving
Flat glass
Veneer sheets, plywood, laminboard, particle & fibre board
Retreaded pneumatic tyres, of rubber
New rubber tyres
Hollow glass
Textile finishing services
Household & toilet paper & paper products
Refined petroleum products
Nonwovens & articles made from nonwovens, except apparel
Industrial gases
Coke oven products
Malt
Pulp, paper & paperboard
Other basic inorganic chemicals
Aluminium & aluminium products
Fertilizers & nitrogen compounds
Basic iron & steel & ferro-alloys
Cement
LimeUK non-EU UK EUG non-EU G EU
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Ratio of energy expenditure relative to gross value added in Germany and UK
0%
10%
20%
30%
40%
50%
60%
70%
Lime
Cement
Basic ir
on & ste
el & fer
ro-allo
ys
Fertilize
rs & nit
rogen
compou
nds
Aluminiu
m & aluminiu
m produc
ts
Other ba
sic ino
rganic
chem
icals
Pulp, pa
per & pa
perboa
rd Malt
Coke ov
en pro
ducts
Indust
rial ga
ses
Nonwove
ns & art
icles m
ade fro
m nonw
ovens,
excep
t appar
el
Refined
petrole
um pro
ducts
Househo
ld & toi
let pap
er & pa
per pro
ducts
Textile
finishi
ng ser
vices
Hollow gla
ssNew
rubber
tyres
Retreade
d pneu
matic tyr
es, of
rubber
Veneer s
heets,
plywood
, laminb
oard, p
article
& fibre b
oard
Flat gla
ss
Other te
xtile w
eaving
Copper p
roduct
ion
Throwing
, prepa
ration
& texture
of silk
,filament
yarn
Ener
gy E
xpen
ditu
re /
GV
A
UKUK (using German energy shares)Germany
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Value at stake for Germany and UK
0% 5% 10% 15% 20% 25% 30% 35% 40%
Casting services of iron
Throwing, preparation & texture of silk,filament yarn
Copper production
Other textile weaving
Flat glass
Veneer sheets, plywood, laminboard, particle & fibre board
Retreaded pneumatic tyres, of rubber
New rubber tyres
Hollow glass
Textile finishing services
Household & toilet paper & paper products
Refined petroleum products
Nonwovens & articles made from nonwovens, except apparel
Industrial gases
Coke oven products
Malt
Pulp, paper & paperboard
Other basic inorganic chemicals
Aluminium & aluminium products
Fertilizers & nitrogen compounds
Basic iron & steel & ferro-alloys
Cement
Lime
UK indirect UK directG indirect G direct
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Share of gross value added in the turnover for German sectors
0%
10%
20%
30%
40%
50%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Lime
Cement
Basic iron & steel & ferro-alloys
Fertilizers & nitrogen compounds
Aluminium & aluminium products
Other basic inorganic chemicals
Pulp, paper & paperboard
Malt
Coke oven products
Industrial gases
Nonwovens & articles made fromnonwovens, except apparel
0%
10%
20%
30%
40%
50%
1995 1997 1999 2001 2003 2005
Refined petroleum products
Household & toilet paper & paperproductsTextile finishing services
Hollow glass
New rubber tyres
Retreaded pneumatic tyres, of rubber
Veneer sheets, plywood, laminboard,particle & fibre boardFlat glass
Other textile weaving
Copper production
Throwing, preparation & texture ofsilk,filament yarnCasting services of iron
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Share of investments in the turnover for German sectors
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Lime
Cement
Basic iron & steel & ferro-alloys
Fertilizers & nitrogen compounds
Aluminium & aluminium products
Other basic inorganic chemicals
Pulp, paper & paperboard
Malt
Coke oven products
Industrial gases
Nonwovens & articles made fromnonwovens, except apparel
0%
5%
10%
15%
20%
25%
30%
1995 1997 1999 2001 2003 2005
Refined petroleum products
Household & toilet paper & paperproductsTextile finishing services
Hollow glass
New rubber tyres
Retreaded pneumatic tyres, of rubber
Veneer sheets, plywood, laminboard,particle & fibre boardFlat glass
Other textile weaving
Copper production
Throwing, preparation & texture ofsilk,filament yarnCasting services of iron
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Supporting material:
Evolution of recent trade patterns
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0
10
20
30
40
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Mt o
f cem
ent
A high domestic market share
• A share of these imports is controlled by EU firms.
• We come back to the observedrise later.
• Even in 2006, Import ratio maybe considered as low given the important price differences acrosscountries.
Climate Strategies – IDDRI Meeting13th September 2007
Extra EU
Intra EU
Non EU Import ratio:
3%
8%
Source: Eurostat
EU cement & clinker imports
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0
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Mt o
f cem
ent
SPAIN
ITALY
PORTUGALHUNGARY BULGARY
FRANCE OTHERS0
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Mt o
f cem
ent
SPAIN
ITALY
PORTUGALHUNGARY BULGARY
FRANCE OTHERS
Is the picture changing?« The rise in non EU imports »
Climate Strategies – IDDRI Meeting13th September 2007
The rise in Spanish and Italian imports is mainly explained by local factors, not by a reduction of trade barriers:• a high consumption growth, +130% and +60% respectively, unlikely to persistover a long time;• a lack of new investment: transitory boom expected, bad forecasts
Source: Eurostat
Destination of non EU Imports
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Is the picture changing?« The recent surge in Chinese imports »
Climate Strategies – IDDRI Meeting13th September 2007
0
2
4
6
8
10
12
14
16
18
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Mt o
f cem
ent
VENEZUELARUSSIA
INDIATHAILAND
EGYPT
TURKEY
CHINE
CROATIA
OTHERS0
2
4
6
8
10
12
14
16
18
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Mt o
f cem
ent
VENEZUELARUSSIA
INDIATHAILAND
EGYPT
TURKEY
CHINE
CROATIA
OTHERS
Source: Eurostat
Chinese imports do not add themselves to the other sources of imports. Chinese cement is mainly substituting for Turkish and Egyptian cement.Non EU imports keep increasing at the same pace, driven by continued Spanish and Italian consumption growth.
Origin of non EU Imports
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Presentation of results from Climate Strategies study
The Differentiation and Dynamics of EU ETS Competitiveness impacts
Convened by:
Supporting material:
Structure and trade trends in the EU Steel sector
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Part 1
1 – General trends in the absence of the EU ETS
B – The EU Steel sector
Climate Strategies – IDDRI Meeting13th September 2007
Long products~ Electric Arc Furnace
EAF
Flat products~ Basic Oxygen Furnace
BOF
~50% ~50%
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Despite important operating cost differencesacross countries, EU market share is high
Climate Strategies – IDDRI Meeting13th September 2007
0
10
20
30
40
1999 2000 2001 2002 2003 2004 2005 2006
Mt
Flat products:
Long products:
Import ratio
Import ratio
14%24%
10%
14%
EU Imports from outside the EU
Source: Eurostat
Moreover, the EU net exports (exports – imports) are positive.
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High international pressure on EU prices?
Climate Strategies – IDDRI Meeting13th September 2007
0
100
200
300
400
500
600
700
800
janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07
USD
/T
EU CHINA CIS LAM TURKEY
Export prices for Hot Rolled Coil
Source: Datastream
EU prices are mainlydetermined by the
prices abroad?
If this were true: the EU pricemenus the price abroadshould be roughly constant
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Moderate international pressure on EU prices
Climate Strategies – IDDRI Meeting13th September 2007
-150
-100
-50
0
50
100
150
200
janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06 janv-07
USD
/T
EU-CHINA EU-CIS EU-LAM EU-TURKEY
EU export price menus RoW export prices for HRC
Source: Datastream
An econometric study on the EU Basic Metals sector, led by Gerald and Scott (2007), concludes that:
The international price has a strong influence on the EU price. The influence of the domestic cost is similarly
strong.
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A world market fragmented?Confirmation by trade data
Climate Strategies – IDDRI Meeting13th September 2007
The world market appears fragmented into regional markets partially interconnected through price.
0
20
40
60
80
100
120
140
160
180
EUROPE EUROPE AMERICA AMERICA ASIA ASIA
Export to Import from Export to Import from Export to Import from
MT
OthersASIAAMERICAEUROPE
Steel trade across Regions
Source: IISI (2007)
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Trade barriers
Climate Strategies – IDDRI Meeting13th September 2007
International Pressure on EU market
Diff
eren
cein
ope
ratin
g co
sts
betw
een
the
EU a
nd th
e R
oW
Transport
Consumption / Capacity
Import restrictionCost of instability
Product differentiation
Service differentiation
Trad
e B
arrie
rs
Import and export tariffs, standards
Proximity with consumers, different stages of tech developments…
Just in time delivery, technical assistance…
Balance on the markets abroad (& domestic)
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Future Challenges
Climate Strategies – IDDRI Meeting13th September 2007
1. Does the 2006 surge in imports signal the start of a continuous decline of trade barriers? Further analysis would be required as part of this rise may beattributed to:
• The apparition of (transitory) excess capacities abroad, notably in China. • The EU rise in consumption (+10% between 2005 and 2006), especially in Italy.
2. Internationalisation of firms: better ability of taking advantage of cost differences Relocation?
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Relocation
Climate Strategies – IDDRI Meeting13th September 2007
Nowadays most of steel plants are built to supply the local markets.
The sustainability of this situation is not guaranteed for BOF semis: high cost differences across countries, relatively low product differentiation.
What scale of relocation for BF semis? Controversial. Relocation barriers:
• Social viscosity, sunk costs and current boom slow down process;• Semis are differentiated products;• Countries are reluctant to host export plants; • The production chain is made sensitive to risks.
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Part 2
2 – Impact of the EU ETSA – Impact on production costs
Climate Strategies – IDDRI Meeting13th September 2007
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Part 2
Climate Strategies – IDDRI Meeting13th September 2007
What is the pass through ability of the EU cement and steel sectors?
2 – Impact of the EU ETSB – Insights from economics literature on the
pass through
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The determinants of pass through
Climate Strategies – IDDRI Meeting13th September 2007
EU production level EU capacity
Marginal production cost
Demand to EU producers
Cost increase
Price increase
EU production level EU capacity
Marginal production cost
Demand to EU producers
Cost increase
Price increase
Pass through under perfect competition
The steeper the EU marginal cost curve, the lower the pass through
The steeper the demand to EU producers, the higher the pass through. Trade barriers makethis curve steep.
Effect of market power • EU market power reduces the pass through? True under some particularassumptions on the demand curve (not too convex).• RoW market power increases the EU pass through: exporters have interestin not flooding the EU market to benefit from higher margins.
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Exogeneous & endogeneous pass through in applied models
Climate Strategies – IDDRI Meeting13th September 2007
Study Sector PT Main assumptions
Szabo et al. (2006) – IPTSHidalgo et al. (2003) – IPTS
CementSteel
100%100%
??
Smale et al. (2006) CementSteel
~ 80%65%
Market power linear demand
Demailly and Quirion (2006) Cement ~ 75% Market power linear demand, capacity constraint, transport costs.
McKinsey and Ecofys (2006) CementBOF SteelEAF Steel
0-15%6%66%
???
Mathiesen and Maestad (2004) BOF SteelEAF Steel
60%80%
Capacity constraint, transport costs and productdifferentiation
Reinaud (2004) CementSteel
0 - 100%0 - 100%
? NB: Average cost pricing? NB: Average cost pricing
Manne and Mathiesen (1994) Aluminium 40% Singificant despite perfect substitution and because of capacity constraint abroad
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Empirical literature (1)
Climate Strategies – IDDRI Meeting13th September 2007
Walker (2006) assesses the pass through of the EU ETS opportunity cost during2005: it varies between 10 and 40%. However, difficult to disentangle between; • The role of the international pressure and • What reduces the opportunity cost (updating, notion of opportunity cost)
Gerald and Scott (2007)Non-Metallic Minerals: The World price is "nowhere significant in explaining movements in the [EU] prices”. Conversely, EU "domestic costs significantly determine a substantial portion of these (…) prices".
Basic Metals sector. The world price has a strong and significant influence on EU prices. The influence of domestic costs is similar. The European price is a more important determinant: “This indicates that environmental tax (…) applied across the EU would limit the effect on competitiveness”.
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Empirical literature (2)
Climate Strategies – IDDRI Meeting13th September 2007
Literature on Exchange Rate Pass ThroughThis estimates the pass through of exporters into their prices for foreign consumers, following a shock on exchange rates. This shock is asymmetric and incurred by few producers, as exporters generally have low market shares on foreign markets.
However, values for relative pass through are not negligible:For cement: 20% in Gaulier et al. (2006), 40% in Knetter (1993) For steel: 40% in Gaulier et al. (2006), 50% in Athukorala and Menon (1994)
The literature gives support to the assumption of significant pass through in both sectors: high pass through in the cement sector, intermediate for the steel sector.
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Part 2
Climate Strategies – IDDRI Meeting13th September 2007
What would be the impact on the two dimensions of competitiveness?
2 – Impact of the EU ETSC – Short run impacts: Insights from a simple
modelling framework
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Modelling assumptions
Climate Strategies – IDDRI Meeting13th September 2007
• Time Horizon: 2015
• Geographical aggregation : EU 27
• Products: BOF steel products are aggregated. Cement products are aggregated.
• Electricty cost increase: 80% pass-through in the electricity sector
• Abatement cost: Marginal Abatement Cost Curve from PRIMES
• Demand drop: depends on the demand elasticity (ε)
• Price increase: depends on the Pass Through
• Market share loss: depends on a trade elasticity (σ), called the Armington elasticity.
KEY PARAMETERS FOR COMPETITIVENESS
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The Armington specification
Climate Strategies – IDDRI Meeting13th September 2007
0
20
40
60
80
100
120
140
160
0,50 0,75 1,00 1,25 1,50 1,75 2,00
EU Price / RoW Price
Mt o
f BO
F st
eel
EU Demand to EU Producers
EU Demand to RoW Producers
σ =5 σ =0.5
σ =2.75 σ =2.75
σ =5σ =0.5
0
20
40
60
80
100
120
140
160
0,50 0,75 1,00 1,25 1,50 1,75 2,00
EU Price / RoW Price
Mt o
f BO
F st
eel
EU Demand to EU Producers
EU Demand to RoW Producers
σ =5 σ =0.5
σ =2.75 σ =2.75
σ =5σ =0.5
0
50
100
150
200
250
300
0,50 0,75 1,00 1,25 1,50 1,75 2,00
EU Price / RoW Price
Mt o
f cem
ent
EU Demand to EU Producers
EU Demand to RoW Producers
σ =2.8
σ =1.6
σ =1.6
σ =0.4
σ =2.8
σ =0.4
0
50
100
150
200
250
300
0,50 0,75 1,00 1,25 1,50 1,75 2,00
EU Price / RoW Price
Mt o
f cem
ent
EU Demand to EU Producers
EU Demand to RoW Producers
σ =2.8
σ =1.6
σ =1.6
σ =0.4
σ =2.8
σ =0.4
0
50
100
150
200
250
300
0,50 0,75 1,00 1,25 1,50 1,75 2,00
EU Price / RoW Price
Mt o
f cem
ent
EU Demand to EU Producers
EU Demand to RoW Producers
σ =2.8
σ =1.6
σ =1.6
σ =0.4
σ =2.8
σ =0.4
Armington specification based on the assumption that products are differentiatedaccording to their place of production debatable for cement.
However, in practice, the value of the Armington elasticity reflects all the tradebarriers between different countries. It is econometrically tested.
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Scenarios
Climate Strategies – IDDRI Meeting13th September 2007
Three scenarios for the international pressure :
• Zero pass through scenario.
• Complete pass through scenario. The value of the Armington elasticity is the highest found in the literature.
They are built to lead to the highest profit margin or market share losses
• Central or Half pass through scenario: The value of the Armington elasticity is the mean of the range of estimates we found in the literature.
We assume that the RoW price remains constant
The three previous scenarios are crossed with the three scenarios on the allocation methodologies and with the three CO2 prices.
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Impact on the import ratio
Climate Strategies – IDDRI Meeting13th September 2007
CO2 price (€/t)15 30 45
Non
EU
Impo
rt r
atio
(%)
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
Auction orFree Eco
Free Ind
10
15
20
27
BAU=8
25
CO2 price (€/t)15 30 45
Non
EU
Impo
rt r
atio
(%)
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
Auction orFree Eco
Free Ind
Auction orFree Eco
Free Ind
10
15
20
27
BAU=8
25
CO2 price (€/t)15 30 45
25
30
BO
F pr
oduc
ts–
Non
EU
Impo
rt r
atio
(%)
BAU=20
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
Auction orFree Eco
Free Ind
Allsteelproducts
–N
on EU Im
port ratio (%)
BAU=17
20
23
CO2 price (€/t)15 30 45
25
30
BO
F pr
oduc
ts–
Non
EU
Impo
rt r
atio
(%)
BAU=20
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
Auction orFree Eco
Free Ind
Auction orFree Eco
Free Ind
Allsteelproducts
–N
on EU Im
port ratio (%)
BAU=17
20
23
• High impacts if one assumes a high CO2 price, a high pass through, a high Armington elasticity, Free Eco or AU and that the RoW price remains constant.
• If not, and especially if one assumes that Free Ind dominates, the impact remains modest.
CEMENT BOF STEEL
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Impact on the EBIT Margin
Climate Strategies – IDDRI Meeting13th September 2007
CO2 price (€/t)15 30 45
-20
20
40
80
EBIT
Mar
gin
(%)
-40
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
60
0
BAU
Free Eco
Free Ind
Auction
CO2 price (€/t)15 30 45
-20
20
40
80
EBIT
Mar
gin
(%)
-40
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
60
0
BAU
Free Eco
Free Ind
Auction
²
CO2 price (€/t)15 30 450
20
BO
F pr
oduc
ts–
EBIT
Mar
gin
(%)
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
30
10
BAU
Free Eco
Free Ind
Auction
Allsteelproducts
–EB
IT Margin
(%)
12
18
6
24
²
CO2 price (€/t)15 30 450
20
BO
F pr
oduc
ts–
EBIT
Mar
gin
(%)
Zero PT Scenario
Half PT Scenario
Complete PT Scenario
15 30 45 15 30 45
30
10
BAU
Free Eco
Free Ind
Auction
Allsteelproducts
–EB
IT Margin
(%)
12
18
6
24
• The impact is huge and positive with a significant pass through if Free Eco dominates; huge and negative under massive auctioning if pass through is not high.
• Under Free Ind, the impacts remain modest. It is not true anymore for the cement sector if we assume low pass through.
CEMENT BOF STEEL
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Part 2
Climate Strategies – IDDRI Meeting13th September 2007
2 – Impact of the EU ETSD – Long run impacts
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Long Run: the relocation issue
Climate Strategies – IDDRI Meeting13th September 2007
Relocation is a concern given the importance of transnational firms. However, two elements soften this fear.
• Closure Rule and the New Entrant Reserve: the emission cost is limited to the value of the allowances that have to be bought (if any).
• Importance of investment costs vs uncertainty on the benefice of relocating because of the EU ETS:
Uncertainties on the allocation methodology, the CO2 price, hence on the cost impact of ETS. The ETS might collapse or some sectors opt out.
The asymmetry of the constraint may be reduced by the spread of the carbon constraint worldwide, the implementation of Border Tax Adjustments or Carbon Export taxes in non EU countries.
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Part 2
Climate Strategies – IDDRI Meeting13th September 2007
2 – Impact of the EU ETSE – Tipping points?
Is there a CO2 price above which imports or relocation become massive, the pass through ability drops to zero, EU firms stop
producing…
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Tipping points
Climate Strategies – IDDRI Meeting13th September 2007
The impact of the ETS on production costs depends on the plant considered (technology, energy mix, product…)
The trade barriers smooth the competitiveness impacts. For example:• Product and service differentiation. The aggregation of personal preferences tends to make the switch from local products to imports smooth. • Transportation costs depend on the geographical location of the exporters’plant and of the targeted EU consumer.Balance between capacity and consumption in the RoW. The size of this barrier depends on the exporting country considered, and varies a lot through time.
Market power of exporters tends to smooth the impacts (no interest in flooding the market).
This suggests that tipping points can only be identified if we make very simplifying assumptions.
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ConclusionsGeneral trends in the absence of EU ETS
Climate Strategies – IDDRI Meeting13th September 2007
Currently, the international pressure on the EU cement sector is generally low and moderate on the steel sector.
In both sectors, we have identified the trade and outsourcing barriers which explain this situation.
“The picture is changing”. This statement requires further support.
Given the importance of transnational firms in these sectors, one may fear a partial relocation of the EU production
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ConclusionImpact of the EU ETS on costs
Climate Strategies – IDDRI Meeting13th September 2007
If one assumes full auctioning of allowances or pure grandfathering, the impact of the EU ETS on productions costs is high for BOF steel and very high for cement.
However, this highly depends on the allocation methodology and the behaviour of manufacturers vis-à-vis the opportunity cost of free allowances.
From the economics literature there are grounds for expecting a high pass through ability in the cement sector, an intermediate in the steel sector.
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ConclusionCompetitiveness impacts
Climate Strategies – IDDRI Meeting13th September 2007
We use a simple short term model based on econometric estimates of the trade sensitivity.
Short term market share or profit margin losses may be very high under unlikely sets of assumptions.
In the long run, one may fear a significant relocation.
However: the current methodology of allocation reduces the emission cost for investment decisions.
to relocate because of the EU ETS is hazardous given the high uncertainty on the future cost impact of the ETS and the permanence of its asymmetry.
Preferably, these conclusions should be “disaggregated”.
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References
Climate Strategies – IDDRI Meeting13th September 2007
• Demailly, D., Quirion, P., 2006. CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation. Climate Policy 6, 93-113.
• Gerald, J.F., Scott, S., 2007. The market structure and sector vulnerability. Working paper for the COMETR Research Project. http://www2.dmu.dk/cometr/
• IISI [International Iron and Steel Institute], 2007. World Steel in Figures. http://www.worldsteel.org
• Kettner C., Köppl A., Schleicher S., Thenius G., 2007. Stringency and Distribution in the EU Emissions Trading Scheme – The 2005 Evidence. WIFO, Vienna, February
• Manne, A.S., Mathiesen, L., 1994. The Impact of Unilateral OECD Carbon Taxes on the Location of Aluminium Smelting. International Journal of Global Energy Issues, 6, 52-61.
• McKinsey & Ecofys, 2006. EU ETS review. Report on International Competitiveness. European Commission, DG environment.
• Reinaud, J., 2004. Industrial Competitiveness under the European Union Emission Trading Scheme, IEA Information Paper.
• Smale, R., Hartley, M., Hepburn, C., Ward, J., Grubb, M., 2006. The impact of CO2 emissions trading on firm profits and market prices. Climate Policy 6(1), 31–48.
• Szabo, L., Hidalgo, I., Ciscar, J.C, Soria, A., 2006. CO2 emission trading within the UE and Annex B countries: the cement industry case. Energy Policy , 34(1), pp. 72-87
• Walker N., 2006. Concrete Evidence? An Empirical Approach to Quantify the Impact of EU Emissions Trading on Cement Industry Competitiveness. School of Geography, Planning and Environmental Policy, University College Dublin. Working Paper.
• Watson, C., Newman, J., Upton, R.H.T., Hackmann, P., 2005. Can Transnational Agreements Help Reduce GHG Emissions? Round Table on Sustainable Development, OECD, Paris.