1. © OECD/IEA - 2007 Competitiveness & carbon leakage – focus on the EU Emissions Trading Scheme - Julia Reinaud Energy Efficiency and Environment, IEA ICTSD 28 November, 2008

2. © OECD/IEA - 2007 Carbon cost impact: Estimating orders of magnitude Starting point: the EU emissions trading scheme (EU ETS) introduces cost on industry and power generation – other regions lag behind in climate policy ETS developing in: Australia / Switz. / Canada / US States Discussions in US Congress / Japan (mandatory) / South Korea Concern: enhanced competitiveness of non carbon constrained producers could lead to ‘carbon leakage’ E.g. Reductions achieved by the EU ETS could result in higher emissions elsewhere Direct costs: allowance purchase  Emissions-intensive industries (EUAs currently trading at around €15 /tCO 2 ) Indirect costs: effect of CO 2 price on electricity prices  Electricity-intensive sectors

3. © OECD/IEA - 2007 Competitiveness- driven CL - a national sector’s perspective - Short term: Production Longer term: Investments Supply-side driven Consumption- driven Increase in emissions outside EU (as a result of the EU ETS) = Decrease in emissions in EU (as a result of the EU ETS) Changes in trade flows as a result of the EU ETS = Indicator of carbon leakage

4. © OECD/IEA - 2007 Summary of EU-ETS Phase 1 (2005-2007) Preliminary assessment No statistical evidence of a change coinciding with the introduction of the EU ETS Great differences btw sectors … Trade intensity EU-ETS costs: emissions intensive vs. electricity intensive sectors Allocation … but some common features across these activities High price environment for industrial commodities Recent slow-down in these activities Yet, Phase 1 is a poor indicator of what may come End of long-term electricity contracts concluded pre-liberalisation More stringent targets (i.e. higher CO 2 prices ) Not enough time to see investment decisions change But can we identify CO 2 price effects on production and invts?

5. © OECD/IEA - 2007 What measures are suggested? 1.Free allocation of GHG allowances to carbon leakage exposed sectors 2.Carbon equalisation system (i.e. border adjustment) 3.Sectoral approaches 4.Lowering the level of the mitigation target

6. © OECD/IEA - 2007 Assessment of measures with int’l implications Sectoral approaches (SA) Pros and limitations  Limits to support? Border adjustments (BA) (In)effectiveness of current proposal (EU) Questions on the table… ‘comparability of action’ Tracking CL =continuous monitoring trade flows  Measurable impact of CO 2 policy in the EU?  More challenging when ROW starts taking action