EU carbon rules will not drive industries abroad, says report

EU carbon rules will not drive industries abroad, says report
Published: 01 March 2010

The regulation of carbon dioxide emissions does not drive industries abroad, a new report says.

According to its findings, the European Union’s emissions trading scheme, one of the world’s toughest mechanisms for carbon regulation, would only result in businesses accounting for about 2 per cent of emissions under the scheme relocating their production overseas.

But the report, by the UK government-funded Carbon Trust, says certain industries are more at risk of "carbon leakage" - companies moving production to jurisdictions with looser regulation.

These include the steel industry and cement making, about 5-10 per cent of which could leave the EU if the toughest possible regulation was enforced.

To avoid this, the European Commission is taking measures to lessen the impact of the rules. In the third phase of the scheme, from 2013 to 2020, sectors such as metals will receive a large number of the permits that allow them to produce carbon for free.

Other sectors such as electricity generation will have to buy more permits at auction, reflecting the fact that it is harder for such industries to move.

Although most countries are in favour of concessions to industries most at risk of carbon leakage, there is a cost to be borne. The Carbon Trust has calculated that if the cement, steel and aluminium industries were issued with free permits, the carbon price to the rest of industry would increase by 10-30 per cent. But profits in the industries granted free allowances would be boosted - the cement sector alone could see its profits rise by £700m ($1.1bn, €780m) to £3.4bn a year.

The report is backed up by other studies that have found the risk of carbon leakage to be small, including a report by the Organisation for Economic Cooperation and Development which found that when companies made decisions over where to place or expand industrial installations, the impact of tougher carbon regulation was far outweighed by factors such as employment costs, transport links, distance to market and the impact of non-environmental regulations.

The threat of carbon leakage has often been used as an argument against tighter regulation of emissions, for instance in the US, where an emissions trading system is still under consideration, though unlikely to be passed. Some European and US politicians have raised the prospect of "border tax adjustments", or taxes on imports based on carbon emitted during their production, to level the playing field between companies in countries that have embraced carbon regulation and in those that have not.

Source: The Financial Times