Does the EU ETS cause carbon leakage in European manufacturing?

Naegele, Helene; Zaklan, Aleksandar

doi:10.1016/j.jeem.2018.11.004

Cited by 191 publications

(77 citation statements)

References 48 publications

(62 reference statements)

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“…The authors note, however, that region-specific productivity shocks could potentially confound the estimated effects of the EU ETS. Naegele and Zaklan (2019) investigate whether the EU ETS caused carbon leakage in European manufacturing sectors, as measured by changes in sector-level international trade flows and related carbon movements. Sector-level trade flows in embodied carbon and value are computed using detailed trade and input-output data (from the Global Trade Analysis Project) for the years 2004, 2007 and 2011.…”

Section: Investment Leakagementioning

confidence: 99%

“…To the best of our knowledge, so far only two studies (Dechezleprêtre et al ., ; Naegele and Zaklan, ) are also those testing for direct evidence of carbon leakage; that is, for whether emissions outside the EU increased as a consequence of the EU ETS. In this case, the very small number of works may be explained by the greater empirical challenges that the particular research question entails.…”

Section: Mapping the Literaturementioning

confidence: 99%

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The Impact of the Eu Emissions Trading System on Competitiveness and Carbon Leakage: The Econometric Evidence

Verde

2020

Journal of Economic Surveys

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This paper carefully surveys the econometric literature that tests for competitiveness effects and related carbon leakage caused by the EU Emissions Trading System (EU ETS). The results of this literature tell us that to date there is no evidence of the EU ETS having had widespread negative or positive effects on the competitiveness of regulated firms, nor is there evidence of significant carbon leakage. However, the paper also identifies three important caveats to this general conclusion. Firstly, the evidence we have still largely refers to the first two trading periods, namely Phases I (2005–2007) and II (2008–2012). Secondly, some heterogeneity of estimated effects is observed, but patterns, notably sectoral patterns, hardly emerge. Thirdly, very little explored is whether the EU ETS has had long‐term effects on the economy via investment leakage or firm dynamics. Further empirical studies investigating these long‐term effects are particularly desirable.

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Section: Investment Leakagementioning

confidence: 99%

Section: Mapping the Literaturementioning

confidence: 99%

The Impact of the Eu Emissions Trading System on Competitiveness and Carbon Leakage: The Econometric Evidence

Verde

2020

Journal of Economic Surveys

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“…While short-term leakage is usually detected through increased imports, long-term production relocation may be analysed through outbound foreign direct investments (FDI, see Koch & Basse Mama, 2016). Several trade flow analyses show that the carbon price level did not lead to any significant carbon leakage in the European primary aluminium sector (Sartor, 2012), in the cement and steel sectors (Boutabba & Lardic, 2017;Branger, Quirion, & Chevallier, 2017) or in manufacturing sectors 11 (Naegele & Zaklan, 2017). Focusing on German and Italian multinationals, respectively, Koch and Basse Mama (2016) and Borghesi, Franco, and Marin (2016) show that the EU ETS did not lead to relocation through outbound FDI for the average firm.…”

Section: Further Hypothesesmentioning

confidence: 99%

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

2018

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Environmental policies may have important consequences for firms' competitiveness or profitability. For the European Union Emissions Trading System (EU ETS) the empirical literature documents that significant emissions reductions have resulted from it. Surprisingly, however, the literature shows that there have been hardly any concurrent negative effects on firms' competitiveness during the first two phases of the scheme (2005-2012). We show that the main explanations for the absence of negative impacts on competitiveness are a large over-allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may have limited the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013-2030). Key policy insights. Empirical literature on the EU ETS shows that there have been hardly any effects on firms' competitiveness or profitability.. One main explanation is a large over-allocation of emissions allowances leading to a price drop. This reduced incentives for innovation.. Moreover, firms were able to pass costs on to consumers in some sectors which partly generated windfall profits.. Innovation effects have so far been small but positive.. We expect to see no negative competitiveness effects on regulated firms in the near future suggesting that no further reliefs for regulated firms are required.

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“…There was and still is discussion about how big this problem will become in reality. There has hardly been any carbon leakage from the EU in the past (e. g. Dechezleprêtre et al, 2014;Naegele and Zaklan, 2019) and various authors also expect only limited (or even negative) leakage for the future (e. g. Heilmayr and Bradbury, 2011;Gerlagh and Kuik, 2014). The latter is indeed a plausible scenario, because the number of carbon pricing schemes around the world is steadily increasing (World Bank et al, 2017: 26-27), because policy-induced low-carbon innovations are likely to spread across countries and because other cost factors than the relatively limited EU ETS compliance costs are more important in the decision whether or not to relocate investments or production abroad (e. g. Sijm et al, 2004;De Cian and Parrado, 2018).…”

Section: Impact On Carbon Leakage and Competitivenessmentioning

confidence: 99%

Emissions Trading Hybrids: The Case of the EU ETS

Woerdman

Nentjes

2019

Review of Law &Amp; Economics

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We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-andtrade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading 'Hybrid' (which we therefore label as 'EU ETH').European Parliament and the Council of the European Union have since adopted an amending Emissions Trading Directive introducing some new rules to apply in the current and third period 2013-2020 (Directive 2009/29/EC). Early 2018 the European Council approved another reform of the EU Emissions Trading System (EU ETS) for the next and fourth period 2021-2030 (Directive (EU) 2018/410). In this paper we aim to examine which rules have changed between the first and the third period and how efficiently the reduction of CO 2 emissions is currently being achieved under the EU ETS. Our economic analysis thus focuses on legal amendments made to the EU ETS so far (2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019)(2020), leaving an analysis of the next period's rules (2021-2030) for future research.We start with a survey of the economic-analytical literature on emissions trading and use that knowledge to assess the efficiency of the original EU Emissions Trading Directive of 2003 and its deterioration due to the changes after 2013. We will explain why the additional rules applying to capacity expansion and plant closure lead to sub-optimal outcomes. A next set of new rules added an extra criterion for the allocation of free allowances by tying their number to the level of operations relative to capacity. Although this was possibly meant as a reparation, we will argue that this has in fact done further damage to the efficiency of the scheme. The various rather complex criteria for the allocation of free allowances did already receive attention by a number of scholars, such as Ahman and Holmgren (2006), Ellerman (2008), Christin et al. (2011), Meunier et al. (2014) and Branger et al. (2015. However, the niche of our paper is that we: (a) perform the analysis based on the conceptual distinction between allowance trading (cap-and-trade) and credit trading (performance standard rate trading); (b) use the current laws and regulations to model firm behaviour under the amended EU ETS; and (c) clarify -in two tables -how the successive revisions of rules in the past have affected corporate decisions and hence the efficiency of EU ETS.In Section...

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Does the EU ETS cause carbon leakage in European manufacturing?

Cited by 191 publications

References 48 publications

The Impact of the Eu Emissions Trading System on Competitiveness and Carbon Leakage: The Econometric Evidence

The Impact of the Eu Emissions Trading System on Competitiveness and Carbon Leakage: The Econometric Evidence

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Emissions Trading Hybrids: The Case of the EU ETS

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