On the Empirical Content of Carbon Leakage Criteria in the EU Emissions Trading Scheme

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

doi:10.2139/ssrn.2362820

Ralf Martin, Mirabelle Muûls + Show 2 more

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https://doi.org/10.2139/ssrn.2362820

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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 €3 billion 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
Our analysis of the correlation between a measure of carbon leakage risk based on managers' responses, and the carbon leakage criteria applied by the European Commission (EC) has revealed that carbon intensity is a good proxy for leakage risk whereas trade intensity is not

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. Carbon leakage creates an excess burden for those countries that regulate emissions to the extent that relocation reduces output, employment, and taxable profits at home. Carbon leakage takes the center stage whenever a new climate change regulation is up for debate. The most common deterrent against carbon leakage has been to either compensate or to

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