Spillover impacts of climate policy on energyintensive industry

Abstract

Energy-intensive industries play a special role in climate policy. These industries are particularly vulnerable if climate policy would lead to higher energy costs, and if they would be unable to offset these increased costs. The side-effects of climate policy on GHG emissions in foreign countries are typically referred to as “spillovers”. This paper provides a review of the literature on the spillover effects of climate policy for carbon-intensive industries. Reviews of past trends in production location of energy-intensive industries show an increased share of non-Annex-I countries. This trend is primarily driven by demand growth, and there is no empirical evidence for a domestic cost increase as a result of environmental policy in these development patterns. Climate models nevertheless do show a strong fleeing of industries to developing countries as a result of such policies. Nonetheless, the energy and carbon intensity of energy-intensive industries is rapidly declining in most developing countries, thus reducing the “gap” between industrialized and developing countries. Despite the potential for positive spillovers in the energy-intensive industries, none of the models used in the analysis of spillovers of climate policies has an endogenous representation of technological change for the energy-intensive industries. This underlines the need for a better understanding of technological development in order to provide a better basis for the economic models used in the ex-ante assessment of climate policy.