1. Leakage Implications for climate policy IFO-PIK Workshop: Transition towards global carbon pricing and fossil energy markets Karsten Neuhoff Leiter Abteilung Klimapolitik DIW Berlin

2. Technology „Leakage“ – example RE investment Karsten Neuhoff, 22.3.2012 2 Source: Bloomberg, New Energy Finance, Jan 2013 1 $ Billion Investment in 2012 16,3 8,3 6,2 5,5 5,3 4,3 2 80,6 Japan Uk Australia South Africa Brazil France Mexico Other countries 67,7 China 44,2 US 22,8 Germany

3. Policy leakage - example feed-in tariff Karsten Neuhoff, 22.3.2012 3 Source: http://www.pv-tech.org/tariff_watch/list 2

4. Modernisation leakage – example slavery Karsten Neuhoff, 22.3.2012 4 accurate, publicly available information about the impact of slavery on lives - also against attempts by slavery's defenders the role of discounting the value of slave lives gradually more ambitious action against slavery, penalties £100/head in 1807 to the death penalty for traders in 1827 compensation for slave owners (£20 million in 1838) not with a global treaty, but country by country 3

5. Cost increase relative to value added Cement Basic iron & steel Lime Fertilisers & Nitrogen Aluminium Other inorganic basic chemicals Pulp & Paper Malt Coke oven Industrial gases Non-wovens Refined petroleum Household paper Hollow glass Finishing of textiles Rubber tyres & tubes manufact. Copper Casting of iron Impact from direct emissions Impact from indirect emissions (electricity) Flat glass Veneer sheets 0% 10% 20% 30% 40% 0.0%0.2%0.4%0.6%0.8% 1.0% 4% 2% Starches& starch products Preparation of yarn Other textile weaving Retreading/ rebuilding tyres Commodities with significant carbon cost Share of GDP of UK Production/Investment leakage – sectors potentially at risk 4

6. Ist all about the detail in analysis, model and policy Karsten Neuhoff, 22.3.2012 6 Climate Policy after Copenhagen – The role of Carbon Pricing, Cambridge University Press 5 0% 10% 20% 30% 40% 50% 050010001500200025003000 Semi finished Hot rolled Iron and steel Illustrative for UK Cumulative gross value added (mio €) Cost increase relative to value added (20 €/t CO 2 ) Total cost increase from higher electricity prices Total cost increase from CO 2 pricing Cost increase from passed on CO 2 pricing of first production stage only

7. Conditions for green paradoxon (I/II) Increase production Investment 5 years Lower revenue for resource extraction due to carbon price Strong carbon price Time frame too short? Uncertainty too high? Demand Response too big? Difficult to see how this should work

8. Conditions for green paradoxon (II/II) Karsten Neuhoff, 22.3.2012 8 Requirement I Scarce resource /increasing cost curve Oil -Iran -Saudi -Russia -Stans Requirement II Optimization horizon Requirement III Ability to control Coal No? GasOil No? T&T No Algeria No US No Yes? Difficult to find actor meeting requirements

9. Summary on leakage channels 9 6 Country A (with cap) Country B Fossil fuel channel Oil (+) Coal (0) Gas (?) Invest uncertainty(-) Modernisation leakage Product./investment leakage (-) (+?) (?) Climate policy Direct Emission reductions Potential leakage Policy leakage Technology leakage (-) Dominant effect: Unilateral climate policy triggers additional international emission reductions

10. Vielen Dank für Ihre Aufmerksamkeit. DIW Berlin — Deutsches Institut für Wirtschaftsforschung e.V. Mohrenstraße 58, 10117 Berlin www.diw.de Redaktion Karsten Neuhoff kneuhoff@diw.de