Abstract
ABSTRACT The production of basic materials accounts for around 25% of global greenhouse gas emissions. Existing measures to reduce emissions from industry are limited due to a combination of competitiveness concerns and a lack of technological options available to producers. In this paper, we assess the possibility of implementing a materials charge to reduce demand for basic industrial products and, hence, also reduce industrial emission levels. The modelling shows that a charge equivalent to around €80/tCO2 could reduce the EU’s total (energy plus process) CO2 emissions by up to 10% by 2050, depending on the substitution options available. The materials charge could lead to small GDP increases and a minor reduction in overall employment levels. Key policy insights Full carbon price pass through along the materials value chain creates incentives for resource efficiency and substitution in the value chain of material use. Most macroeconomic models ignore mitigation opportunities in the value chain, as do carbon pricing mechanisms for industrial emitters, which largely mute incentives for mitigation opportunities with free allowance allocation. Including consumption at a benchmark level in emission trading systems reinstates a full carbon price incentive for all mitigation opportunities while avoiding competitive distortions and carbon leakage risks. Macroeconomic modelling shows that this allows for an additional 10% emission reduction accompanied by a slight GDP increase and employment reduction. Long-term clarity on carbon leakage protection furthermore strengthens low-carbon investment frameworks.
Highlights
Introduction and policy backgroundEmissions linked to the production of basic materials like steel and cement constitute around 25% of global greenhouse gas emissions (IEA, 2017)
Much of the previous analysis of measures for reducing emissions from the industrial sector has focused on carbon pricing, with the same price applied to all economic sectors
The analysis of consumption-based emissions (e.g. Hertwich & Peters, 2009; Minx et al, 2009), which draws upon input-output analysis, captures the emissions embodied in the trade of physical goods. These approaches are well established and have on occasion been used for scenario analysis (e.g. De Koning, Huppes, Deetman, & Tukker, 2016; Wiebe, Bjelle, Többen, & Wood, 2018) but are less applicable to the discussion in the present paper for two reasons: first, the analysis based on these approaches is often based along the lines of the available economic data and second, a standard input-output framework is not well equipped to deal with changes in prices
Summary
Emissions linked to the production of basic materials like steel and cement constitute around 25% of global greenhouse gas emissions (IEA, 2017). In the absence of a global carbon price, policy makers must, find a way of providing a price-based incentive to reduce emissions from material production, while avoiding the potential for large-scale carbon leakage Such measures could help to enhance material and resource efficiency throughout the economy and enhance public acceptance of climate policy (Cherry, Scott, Barrett, & Pidgeon, 2018). Products sold to European consumers are subject to a charge that is proportional to the weight of the materials covered by the consumption charge, multiplied by a benchmark for the carbon intensity of the production of the material through a conventional production process (Pauliuk, Neuhoff, Owen, & Wood, 2016) Such benchmarks have already been defined and quantified for the free allowance allocation and power price compensation under the existing EU ETS and other emission trading schemes globally (Zipperer, Sato, & Neuhoff, 2017).
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