On the empirical content of carbon leakage criteria in the EU Emissions Trading Scheme

Ralf Martin,Mirabelle Muûls,Laure B De Preux,Ulrich J Wagner

doi:10.1016/j.ecolecon.2014.05.010

Ralf Martin, Mirabelle Muûls + Show 2 more

Open Access

https://doi.org/10.1016/j.ecolecon.2014.05.010

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Abstract

The EU Emissions Trading Scheme continues to exempt industries deemed at risk of carbon leakage from permit auctions. Carbon leakage risk is established based on the carbon intensity and trade exposure of each 4-digit industry. Using a novel measure of carbon leakage risk obtained in interviews with almost 400 managers at regulated firms in six countries, we show that carbon intensity is strongly correlated with leakage risk whereas overall trade exposure is not. In spite of this, most exemptions from auctioning are granted to industries with high trade exposure to developed and less developed countries. Our analysis suggests two ways of tightening the exemption criteria without increasing relocation risk among non-exempt industries. The first one is to exempt trade exposed industries only if they are also carbon intensive. The second one is to consider exposure to trade only with less developed countries. By modifying the carbon leakage criteria along these lines, European governments could raise additional revenue from permit auctions of up to €3billion per year, based on a permit price of €30.

Highlights

It is widely recognized that the problem of carbon leakage poses a major challenge for designing effective unilateral policies aimed at mitigating global climate change
We find a strong positive association of vulnerability score (VS) with carbon intensity, but no statistically significant association with trade intensity
Trade exposure could matter for very high values of Trade Intensity (TI) only, or only when it coincides with high Carbon Intensity (CI)

Summary

Introduction

It is widely recognized that the problem of carbon leakage poses a major challenge for designing effective unilateral policies aimed at mitigating global climate change. In its most direct manifestation, carbon leakage occurs when polluting plants that are subject to climate policy relocate to an unregulated jurisdiction. Since carbon emissions are a global pollutant, their “leaking” to unregulated places reduces the environmental benefits from the policy. Virtually all of the numerous carbon taxes that have emerged in Europe since the 1990’s grant rebates or exemptions to energy-intensive firms in order to prevent them from relocating.. Virtually all of the numerous carbon taxes that have emerged in Europe since the 1990’s grant rebates or exemptions to energy-intensive firms in order to prevent them from relocating.1 While this practice may be justified from the point-of-view of industrial policy, it runs counter to the polluter-pays principle underlying environmental policy-making in the EU. Addressing carbon leakage is a difficult and controversial policy issue

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