Abstract
From 2013 the total quantity of permitted CO2 emissions in the European Union will be decreasingly capped, putting pressure on their unit price. This in turn will influence carbon-intensive companies’ total costs and potentially affect profit margins. This article offers analysis of a small open country’s carbon-intensive firms’ variable cost sensitivity to CO2 prices at €15, €25 and €50 per tonne, using Estonia as a reference. The analysis reveals that firms using heavily carbon-intensive fuels (such as oil shale) could experience variable cost increase up to 100%. Although such fuel is primarily used in Estonia’s electricity generation, the biggest impact would hit the country’s mineral sector where carbon-intensive manufacturing faces on average a 20% variable cost change. Such companies could eventually move their activities outside the EU.
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