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Competitiveness protection Better tax imports than compensate inland producers Martijn Overgaag 03/04/2014
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Competitiveness protection

Jan 23, 2015

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Technology

Ecofys

This presentation was part of the session "International Trade: Consumption Based Emissions and Carbon Reduction Border Tax Adjustments" at the Istanbul Carbon Summit in April 2014. Martijn Overgaag, Unit Manager Industrial Processes at Ecofys, presented insights on "Competitiveness protection" and why border tax adjustments might be more efficient and effective than giving out free allowances.
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Page 1: Competitiveness protection

Competitiveness protection

Better tax imports than compensate

inland producers

Martijn Overgaag

03/04/2014

Page 2: Competitiveness protection

© ECOFYS | |

Better tax imports than compensate inland producers

> Many different national/regional GHG-combat mechanisms will coexist

> Regions need to recognize competitive disadvantage compared to peers

– Compensation schemes are mostly “free allowance” based

– Effects are dynamic;

– Compensation schemes become increasingly complex.

> Border tax adjustments are more efficient and effective than giving free

allowances

– Adjusting border taxes provides incentives for importing supply chains too

– Adjusting taxes is also good for treasury of the country;

– Taxes may replace ‘general’ import and export levies that harm developing

countries.

> Getting the numbers right is equally complicated as benchmark developments;

> Introduce tax, but also exemptions for importers that have a demonstrated comparable

effort

03/04/2014 Martijn Overgaag

Page 3: Competitiveness protection

© ECOFYS | |

Current greenhouse gas emission trends projected to

warming > 2 degrees

03/04/2014 Martijn Overgaag

http://climateactiontracker.org/assets/publications/publications/CAT_Trend_Report.pdf

Page 4: Competitiveness protection

© ECOFYS | |

World Bank report 2013 “Mapping carbon pricing initiatives”

03/04/2014 Martijn Overgaag

Ecofys is now preparing the 2014 edition of the World Bank Carbon Pricing Report which will be

launched at Carbon Expo in May, 2014. Full report:

http://www.ecofys.com/files/files/world-bank-ecofys-2013-mapping-carbon-pricing-initiatives_summary.pdf

Coming soon

Page 5: Competitiveness protection

© ECOFYS | |

Cap & trade system

• Guarantee environmental outcome and let the market

determine the price;

• Have economy make investments where reductions are

cheapest.

Price (€ / t CO2) = f (real emissions, emission rights available)

Time

Total

emission

rights in

ETS

C A P

C A P €

Emission right

Cap and trade system

What is a Cap-and-trade system?

Martijn Overgaag 03/04/2014

Page 6: Competitiveness protection

© ECOFYS | |

Introducing carbon costs to manufacturing supply chains is

an effective means to fight global carbon emissions…

…if costs are implemented only in a specific region, competitiveness may be distorted: Carbon Leakage

Martijn Overgaag 03/04/2014

Page 7: Competitiveness protection

© ECOFYS | |

Determination of carbon leakage risk: trade and cost

Martijn Overgaag 03/04/2014

Page 8: Competitiveness protection

© ECOFYS | |

> In Australia assistance factor is multiplied with average intensity,

instead of benchmark level.

03/04/2014 Martijn Overgaag

Carbon leakage classification and assistance factors

in 3 ETS regions

EU ETS California Australia

CL

High High

Medium Medium

No CL Low No CL

100%

80%30%

100%50%

100%30%

100% 94.5%

66%

0%

Page 9: Competitiveness protection

© ECOFYS | |

Eligibility criteria for CL compensation in EU

03/04/2014 Martijn Overgaag

Trade ratio

In

du

ced

carb

on

co

st

rati

o

10% 20% 30%

10%

20%

30%

Maximum

compensation EU

Page 10: Competitiveness protection

© ECOFYS | |

Eligibility criteria for CL compensation in EU versus

Australia

03/04/2014 Martijn Overgaag

Trade ratio

In

du

ced

carb

on

co

st

rati

o

10% 20% 30%

10%

20%

30%

Maximum

compensation EU

Maximum

Compensation AUS

Medium

Compensation AUS

Page 11: Competitiveness protection

© ECOFYS | |

Eligibility criteria for CL compensation in EU versus

California

03/04/2014 Martijn Overgaag

Trade ratio

In

du

ced

carb

on

co

st

rati

o

10% 20% 30%

10%

20%

30%

Maximum

compensation EU

Maximum

Compensation CAL

Medium

Compensation CAL

Page 12: Competitiveness protection

© ECOFYS | |

What to do when more and more countries have an ETS, and

incompatible competitiveness protections?

U.S Cement importing

03/04/2014 Martijn Overgaag

Based on publicly available data from United State Geological Survey, above figure shows volumes

imported Portland cement to U.S by different countries from 2001 - 2011. The figure shows that imports

declined after 2006, specifically from China. Since 2009, Canada is by far the largest import source.

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Canada

Korea

China

Colombia

Mexico

Taiwan

Greece

Sweden

Spain

Denmark

Other countries

ktonne product

Ye

ar

Fact

Source: Ecofys for State of California: work in progress

Page 13: Competitiveness protection

© ECOFYS | |

Challenge: comparing efforts of third countries

Comparison of third country commitments to reducing GHG emissions

– Japan, South Korea, Australia have ambitious policy in place, possibly comparable

to EU;

– China, India: emerging mandatory policy packages, impact for industry uncertain

yet;

– Brazil, Indonesia, South Africa show less strict policies: voluntary actions;

– Russia, Canada, USA: laggards, no coherent, ambitious and national policy

framework in place or to come.

> Comparison of GHG efficiencies between EU and third countries

Limited availability on carbon efficiencies complicates cross-country:

Public data sources are not a good basis for cross-country GHG efficiency

comparisons due to serious flaws in combing data from different sources;

Exceptions consist of the aluminum and cement industry where company

data is collected in a methodologically sound and transparent way.

03/04/2014 Martijn Overgaag

Source: Oeko Institut e.V./Ecofys: Support to the Commission for the determination of the list of sectors and subsectors deemed to be exposed to a significant risk of carbon leakage for the years 2015 - 2019 (EU Emission Trading System), January 2013.

Page 14: Competitiveness protection

© ECOFYS | |

Options to introduce border carbon adjustments

> Include importers in the Cap-and-Trade Program. Importers are subject to full Cap-and-

Trade requirements as covered entities. The drawback is that the current allowance

budget under the Cap-and-Trade Program does not account for emissions associated

with potential production outside of California due to leakage.

> ‘Linked cost’ for importers with no market mechanism. Importers are subject to a cost

calculated based on (Emissions obligation x Cap-and-Trade allowance price(s)), but

there is no provision for market flexibility.

> Create an independent allowance pool for importers with equivalent program

stringency. Two possibilities are related to this option:

> a. Replicate a ‘mini’ Cap-and-Trade allowance pool with full market mechanism.

> b. Create a simplified purchase/sales system with equivalent program stringency.

Source: Ecofys for California Air Resources Board, work in progress.

03/04/2014 Martijn Overgaag

Source: Ecofys for State of California: work in progress

Page 15: Competitiveness protection

© ECOFYS | |

Border tax adjustments is better than free allowances,

both on effectiveness and efficiency

Environmental effectiveness

• carbon leakage rate

• inside emissions saving

• global emissions saving

• certainty

Distributional impact

• consumer impact

• firm impact

• fiscal cost

Efficiency

• welfare cost/ton global GHG,

• welfare cost/ton domestic GHG

Feasibility

• domestic

• international

• institutional

Administrative cost

03/04/2014 Martijn Overgaag

But: international feasibility is a key challenge. However: no reason to back away from taking the challenge

Source: Ecofys/Vivid Economics for DECC: work in progress

Page 16: Competitiveness protection

© ECOFYS | |

How to push the supply chain into low carbon:

95 g/km Ecodesign

03/04/2014 Martijn Overgaag

Source, THE SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED, 2014

http://www.ecofys.com/en/publication/economic-benefits-of-the-eu-ecodesign-directive/

Page 17: Competitiveness protection

© ECOFYS | |

Better tax imports than compensate inland producers

> Many different national/regional GHG-combat mechanisms will coexist

> Regions need to recognize competitive disadvantage compared to peers

– Compensation schemes are mostly “free allowance” based

– Effects are dynamic;

– Compensation schemes become increasingly complex.

> Adjusting border taxes provides incentives for importing supply chains too

– Adjusting taxes is also good for treasury of the country;

– Taxes may replace ‘general’ import and export levies that harm developing

countries.

> Getting the numbers right is equally complicated as benchmark developments;

> Introduce tax, but also exemptions for importers that have a demonstrated comparable

effort

03/04/2014 Martijn Overgaag

Page 18: Competitiveness protection

© ECOFYS | | 03/04/2014 Martijn Overgaag

Please contact us for more information

Ecofys Netherlands B.V.

Kanaalweg 15G

3526 KL Utrecht

The Netherlands

I: www.ecofys.com

Martijn Overgaag

T: +31 (0)30 662-3232

E: [email protected]