Transcript Slide 1

New thinking for hard times:
sustaining carbon pricing and financing in a
world of unequal participation
Professor Michael Grubb
Chair, Climate Strategies
Senior Research Associate, Faculty of Economics, Cambridge University
& Editor-in-Chief, Climate Policy Journal
Presentation to World Trade Organisation / ICTSD event
Cancun
December 2010
Hard times
– US non-participation, Japan clearly unwilling to proceed
without US
– Shifting trade patterns reduce role of EU emissions
globally
– Recession and accumulated debt
– Global uncertainty about future of regime, UNFCCC
deadlocked
• How effective is EU domestic action to 2020?
• How can EU proceed when it finds itself almost
alone in attempting to price carbon?
• Trade-related sources of climate finance?
Hard times
–
–
–
–
US non-participation, Japan clearly unwilling to proceed without US
Shifting trade patterns reduce role of EU emissions globally
Recession and accumulated debt
Global uncertainty about future of regime, UNFCCC deadlocked
• How effective is EU domestic action to 2020?
– Global carbon flows: results of recent Carbon Trust study
into carbon embodied in international trade
– Carbon leakage as a result of EU ETS
• How can EU proceed when it finds itself almost
alone in attempting to price carbon?
• Are there potential new sources of climate finance?
Percentage change in territorial emissions
to reflect impact of consumption of CO2
The impact of a consumption based view on emissions by
country compared to production
2004 Data
120%
Non-Annex 11 EU
Other Annex 11
Hong
Kong
80%
60%
40%
20%
Sweden
France
UKSpain
Germany
Italy
Japan
USA
0%
-20%
-40%
-60%
India
Brazil
Canada
Russia
Poland Czech
Rest of West
Republic
Asia
China
Ukraine
South
Africa
2004 territorial CO2 emissions (27Gt)
1. Annex 1 to UNFCCC
Note 1: Includes CO2 emissions from production, process, transport and household sources only (27Gt in 2004); excludes non-CO2 emissions, and emissions due to land-use-change
Note 2: Based on an MRIO (multi region input/output) model allocating emissions to regions of consumption
Source: Carbon Trust Analysis; CICERO / SEI / CMU GTAP7 MRIO Model (2004)
UK CO2 emissions from a consumption perspective
Domestic emissions have been reduced but UK carbon footprint still risen
Production emissions1
Consumption emissions
632MtCO2
Household
energy: 32%
17%
International
aviation & shipping
Other
Industry (Heat
and Industrial Processes)
Residential &
Commercial Heat
22%
Domestic
Transport
31%
Electricity
Generation
7%
4%
18%
2004 Data
845MtCO2 Other
consumption: 68%
Imported
emissions
54%
Domestic
emissions
46%
Household Household
direct emissions2
electricity
Household
Transport (fuel)
Fuel3
Public Retail &
sector4 Hospitality5
Business
Services6
Food & Beverages
Construction
Electronic
equipment
Transport (non-fuel)9
Machinery & Equipment8
Clothing
Chemical based products7
Note 1: CO2 only – excluding non CO2 emissions and land use change
1. Based on split of emissions from Committee on Climate Change (CCC) 2. All direct combustion of fuel in households for heating, cooking, etc 3. Includes all non-domestic Air, Rail, Sea & Road
transport operation 4. Includes Defence, Health & Public Administration 5. Includes Retail, Hotels, Restaurants 6. Includes Financial Services, Communication Services and other business services
7. Includes household chemicals, cosmetics, pharmaceuticals 8. Includes domestic appliances and industrial machinery 9. Includes automotive, aviation, rail, road and marine
Source: CT Analysis; CICERO / SEI / CMU GTAP7 MRIO Model (2004); CCC
Projected production & consumption of EU ETS traded sectors
(excluding electricity)
Evolution of EU ETS
Production & Consumption
Drivers of change between
2005 and 2020 emissions
GtCO2
GtCO2
~2% of emissions 'leak‘
1.6
1.6
1.4
1.4
1.4
1.4
1.4
1.4
0.2
1.4
1.4
0.04
1.2
0.5
1.2
0.6
0.7
1.0
0.7
Imports (ETS)
0.2
0.5
Leakage
in-flow
1.0
0.7
Imports
0.5
Production
(net of exports)
0.2
Production
(exported)
0.8
0.8
0.6
0.6
0.7
0.7
0.6
0.4
0.5
Production (ETS
ex electricity,
net of exports)
Production (ETS,
exported)
0.2
0.7
0.4
0.2
0.2
0.2
0.2
0.2
2005
2010
2015
2020
0.0
0.2
0.0
2005
Abatement
Leakage
Flows
2020
Note 1: Declining production emissions based on expected contribution from non-electricity sectors to declining ETS cap (CASE II Model)
Note 2: Growth in imported emissions based on continuation of historic growth in gross imports, and varying degrees of decarbonisation in the exporting countries. In the displayed scenario, it is
assumed that the emissions intensity of exports from Brazil, Russia, India and China (BRIC nations) decline in line with 50% of the targets noted in the Copenhagen Accord (2009), that exports
from the EU and other Annex I nations decline in line with the EU’s target to reduce emissions by 20% from 1990-2020, and that exports from the rest of the world achieve decarbonisation of
the order of half that achieved in the BRIC countries.
Source: Carbon Trust Analysis based on data from: Addressing leakage in the EU ETS: Results from the Case II Model (Climate Strategies, 2009); CICERO / CMU / SEI GTAP 7 MRIO/ EEBT
Model (2004); Cutting Carbon in Europe: The 2020 plan and the future of the EU ETS, Carbon Trust (CTC734, 2008)
But:
• without countermeasures
may be significant for key
sectors (eg. 40% of steel
“emission savings” are due to
offshoring)
• leakage rises with the
degree of effort (eg. EU move
to 30%)
• effects may vary a lot
between different regions,
facilities
• “all politics is local”
• growing international carbon
flows undermine impact of
domestic measures anyway
Myth 2. “… So if aggregate leakage is modest it is not a big problem”
Carbon flows lesson impact, and economic loss with no environmental benefit is never politically acceptable
Source: Carbon Trust / Climate Strategies
Myth 1: “EU faces large scale carbon leakage from the EU ETS”
Hard times
–
–
–
–
US non-participation, Japan clearly unwilling to proceed without US
Shifting trade patterns reduce role of EU emissions globally
Recession and accumulated debt
Global uncertainty about future of regime, UNFCCC deadlocked
• How effective is EU domestic action to 2020?
• How can EU proceed when it finds itself almost
alone in attempting to price carbon?
– Basic options
– Impact of free allocation
– Paying for consumption – border levelling
• Trade-related sources of climate finance?
‘Leveling down the costs’ with free allocation
Myth 3. “Free allocation is an effective solution”
• To be effective in tackling carbon leakage, such ‘leveling down’ must be
aligned with production and investment decisions
– Fixed allocation under the EU ETS may not deter operational leakage
– Effectiveness declines under declining caps or finite duration
Myth 4. “Free allocation is free”
• Protecting energy intensive sectors inevitably requires the rest of the
economy to ‘work harder’ to reach a given emissions target
• Degrades the underlying incentives to decarbonise
• The need to align may negate more of the incentives to decarbonise
along supply chain – particularly with ‘output-based’ allocation (US and
EC models greatly underestimate this potential impact)
• Also can be seen as a trade distortion – eg. through over-allocation,
output-based and (eg. agricultural) offsets
•
And yet, this is the solution dominant in EU, Australia (& former US proposals)
Source: Climate Strategies (2009): Droege S. et al., Tackling Carbon Leakage in a world of
unequal carbon prices, final report
Fundamental options for addressing carbon leakage
- Level down, adjust at border, or wait to level up everywhere?
Adjust costs
downwards
Adjust global costs
upwards
Adjust costs at
border
Conditional allocation
Global carbon pricing
Border Adjustments
Price with carbon
cost
Imports into
ETS
Exports from
ETS
Price without carbon
cost
ETS
Rest of
World
ETS
Rest of
World
ETS
Rest of
World
CARBON LEAKAGE – MYTHS AND REALITIES
We have two profoundly different Border Adjustment discussions
Trying to deter ‘inadequate’ action by other countries is very
different from focused objective to tackle carbon leakage
• Threatening trade measures against countries not taking
‘comparable’ action
– Extra-territorial judgement on ‘adequate’ action
– Explicitly discriminatory
• Tackling carbon leakage through border levelling
– In principle, cost-levelling between domestic and international
where a specific problem can be demonstrated
– Generally non-discriminatory
CARBON LEAKAGE – MYTHS AND REALITIES
Myth 5. “The best general solution is to protect our economies and pressurise other
countries using border adjustments”
The feasibility, effectiveness and economic and political consequences of border
adjustments varies according to sector characteristics
- Diverse production processes and products increase potential for distortions
and abuse
- May be more controversial for exports than (benchmarked) imports
Any border measures need justification on sector-specifics not generalities
Myth 6. “All Border adjustments are discriminatory, threaten trade & political relations”
We already do it … (eg. excise taxes on petroleum, and VAT)
Benchmarked ‘Best Available Technology’ border levelling is compliant with GATT
Articles I and III - no need to negotiate exemptions
Border leveling is particularly relevant to sectors that are:
• Energy intensive and operate in international markets
• Relatively homogenous products - operates on price competition
• Relatively homogenous production processes – benchmarks are useful
• High operating carbon cost impacts (plants might otherwise part load)
Characteristics of border leveling
Charging embodied carbon on sector-by-sector basis as appropriate
Global emissions
Emissions from different
industrial processes
Iron and Steel - direct
12.2%
Key criteria
• Scale of emissions
• Scale of leakage concern:
Other - electricity
23.7%
Iron and Steel electricity 5.8%
•
•
Relative impact of carbon costs
Scale of existing trade barriers
• Availability of alternatives
•
Cement - direct 7.6%
Cement - electricity
2.7%
Other - direct 15.5%
Non-ferrous metals direct 1.1%
Chemicals and
petrochemical electricity 7.2%
Chemicals and
petrochemical - direct
5.9%
Non-ferrous metals electricity 4.8%
•
Effectiveness and losses associated
with free allocation
State of international sectoral
agreement
• Feasibility of border leveling
•
•
Diversity of products
Diversity of production processes
• Cement is the most obvious sector
initially
Hard times
–
–
–
–
US non-participation, Japan clearly unwilling to proceed without US
Shifting trade patterns reduce role of EU emissions globally
Recession and accumulated debt
Global uncertainty about future of regime, UNFCCC deadlocked
• How effective is EU domestic action to 2020?
• How can EU proceed when it finds itself almost
alone in attempting to price carbon?
• Trade-related sources of climate finance?
International finance - challenge
• Most sources of international public finance have to pass
through the sieve of domestic politics in developed
countries
– The hand of the Treasuries, subject to high-level political commitments
• But under pressure from national debt
– The court of public opinion
• Under pressure from recession and fear of the emerging economies as economic
competitors
• New sources of finance ..
Source: Climate Strategies (2009): Droege S. et al., Tackling Carbon Leakage in a world of
unequal carbon prices, final report
Table 1. Indicative carbon revenues from cement and steel
- Revenues from Production and border levelling on imports trade
Europe
OECD
Produc Impo Produc Impo
tion
rts
tion
rts
Cement Volume
(Mt)[1]
Carbon emissions benchmarked @ 0.7 tCO2/tonne
cement
Revenue if paid at €30/tCO2
Steel Volume
(Mt)[2]
Carbon emissions benchmarked @ 1.8 tCO2/tonne
steel
Revenue if paid at €30/tCO2
250
35
175
5250
24.5
735
120
70
216 126
6480 3780
560
70
392
49
11760 1470
250
130
450 234
13500 7020
Source: M. Grubb ‘International climate finance: the case for international use of border levelling
charges’, forthcoming in Finance Special Issue of the Climate Policy, Ed. Erik Haites, March 2011
New thinking for hard times:
sustaining carbon pricing and financing in a
world of unequal participation
Professor Michael Grubb
Chair, Climate Strategies
Senior Research Associate, Faculty of Economics, Cambridge University
& Editor-in-Chief, Climate Policy Journal
Presentation to seminar at Centre for Policy Research, Delhi
October 2010
ANNEX
Six key myths regarding the issue of carbon
leakage...
1. Carbon leakage is a major economic and environmental
problem...
2. ... Oh: so if aggregate numbers are small it is not a big
problem
3. Free allocation is an effective solution
4. Free allocation is free
5. We can and should protect our economies with border
adjustments
6. Border adjustments are discriminatory and threaten
world trade and political relations
Why we need a mature debate about consumption
accountability and border levelling
• The problem is ultimately one of consumption, so it makes sense to hold
consumers accountable for the emissions of their consumption choices
– & Why should consumers discriminate against their own producers in favour of imports?
• Leakage fears are messing up cap-and-trade schemes around the world
– & as caps tighten, even free allocation is insufficient to forestall debate – border-related
measures already included in the US and rising in the EU
• Money: Using the European cement sector as an example,
– 100% free allocation could increase sector profits by between €2.5-4bn per annum
to 2010. Equivalent funds could be generated for the public sector if these allowances
were auctioned.
– Revenue from the border component would be several €100ms annually and use of
these revenues could be subject to international negotiation.
• If regions that are willing to take stronger action are expected to suffer
unnecessary economic losses that are not even associated with saving any
emissions, there is no way to solve climate change
CARBON LEAKAGE – MYTHS AND REALITIES
After Copenhagen, sustaining action in a world of unequal carbon prices
– and raising revenue for ‘greening growth’ at home and abroad - is of
fundamental importance and so these myths need to be dispelled
Myth
Reality
Carbon leakage is a major
economic & environmental
problem
… so if aggregate numbers are
small it is not a big problem
Free allocation is an effective
solution
Free allocation is free
At the present level of ambition, even with purely unilateral action and
no free allocation or border protection, leakage would be only a few
percent of EU emissions
Politically impossible (and unreasonable) to ignore loss of important
and powerful industries without even saving any emissions
Free allocation can help tackle investment leakages in some sectors,
but is far from a panacea
Free allocation increases costs to the rest of business and to a much
greater extent than most models predict, due to a basic modelling
omission
Border adjustments in many sectors are technically difficult, legally
debateable and politically explosive – but an evolutionary approach to
leveling costs in appropriate sectors is viable
… border leveling in the right sectors is non-discriminating, the only
effective approach, could raise funds for international purposes, and a
reasonable and necessary part of evolving global responses
The best solution is to protect
our economies with border
adjustments
Border adjustments threaten
world trade etc
Technically speaking, border leveling clearly more effective
Free allocation cuts leakage but increases carbon price
- Border levelling cuts leakage without significant efficiency loss, and greater scope
Source: Carbon Trust / Climate Strategies
CARBON LEAKAGE – MYTHS AND REALITIES
Tackling carbon leakage
Available at: www.climatestrategies.org
Available at: www.carbontrust.co.uk
A few key sectors may need sector-specific
journeys towards global action
NEW THINKING FOR HARD TIMES
Thank you for your attention!
Climate Strategies contact details
Climate Strategies
c/o University of Cambridge, 13-14 Trumpington Street, Cambridge, CB2 1QA, UK
Office: +44 (0) 1223 748812, www.climatestrategies.org
Managing Director: Richard Folland
Chair: Michael Grubb
Non Executive Directors:
Michel Colombier, Director, IDDRI, France
Benito Müller, Oxford Institute of Energy Studies and Oxford Climate Policy, UK
Jon Price, Director, Centre for Low Carbon Futures
Hans-Jürgen Stehr, Director, Danish Commission on Climate Change Policy
Thomas L. Brewer, Georgetown University, Washington DC
Climate Strategies is grateful for funding from the government of Australia, Agence de l'environnement et de
la maîtrise de l'énergie (ADEME) in France, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) in
Germany, Ministry of Foreign Affairs (MFA) in Norway, Swedish Energy Agency (SEA) Sweden, Department
for Environment, Food and Rural Affairs (DEFRA), the Office of Climate Change (OCC), Department of
Energy and Climate Change (DECC), Department for International Development (DFID) in the UK, The
Carbon Trust, Nordic COP15 Group, Corus Steel, Center for International Public Policy Studies (CIPPS) in
Japan, European Climate Foundation (ECF) in The Netherlands, and the German Marshall Fund of the United
States.