January 28, 2008
With the title of this workshop at EBS 2008 we want to highlight the important links between climate change policies, international trade and competitiveness. There have also been calls to use measures at the border to compensate for the competitiveness effects of the EU’s climate change policies. There are concerns about the so-called carbon leakage effect – when companies shift carbon-intensive production to regions without a climate policy. But there are also innovative solutions being proposed by companies to address climate concerns.
International aspects of EU climate policies
Beyond the wider objectives of seeking a global framework to mitigate climate change, the European emissions trading scheme (ETS) has some specific international aspects.
First, and despite its shortcomings, the ETS is a model for a future global market for carbon. It is essential that the ETS be designed with this idea in mind because over time, there will need to be bridges built between different carbon markets around the world – just as there are links between stock exchanges.
Second, the Kyoto Protocol foresaw the need to link ETS with voluntary technology transfer to developing countries through the so-called Clean Development Mechanism (CDM) which enables European companies to invest in CO2 reduction projects in developing countries and to claim credits for those investments in the ETS. A key issue for the future will be to optimise and ensure the long term viability of the CDM process as a tool for voluntary technology transfer to developing countries.
Challenges for a new ETS: Trade & Competitiveness and Carbon Leakage
One of the challenges facing Europe today is how to pursue its own climate change strategy based on the 20% reduction of greenhouse gas emissions, 20% improvement in energy efficiency and 20% use of renewable energies while simultaneously negotiating a global framework for climate change through which all major emitters contribute to the fight against global warming. This link between EU policies and a future global framework has generated a lot of debate in industry and public policy circles. Indeed, there are concerns that the EU could move forward faster than its main competitors in the fight against climate change and that this may not help the environment or European competitiveness.
First, such a rapid move could encourage energy or carbon-intensive industries to shift their production outside of Europe to avoid the added costs of an ETS. In other words, global carbon levels would not be reduced; they would simply leak outside of the EU system.
Second, energy or carbon-intensive industries that maintain production in Europe would face additional costs linked to emissions trading credits. For industries facing international competition, there would be limited room to pass on the additional costs to customers and hence, their international competitiveness would be eroded.
This dilemma has led policy-makers to reflect on ways to counter these negative effects. One idea has been to introduce measures at the border to counter the competitiveness impacts on European industry. This has generated a lot of negative reactions from export-oriented industries concerned about possible retaliation and about the complexities of such an approach. Another idea has been to envisage global sectoral benchmarks for energy-intensive industries to prevent carbon leakage and establish a level playing field for international competition. However, progress on this front requires international cooperation between industries and an appropriate international framework to facilitate such agreements. Yet another idea has been to consider specific conditions for energy-intensive industries under the ETS to reduce the competitiveness impacts as much as possible. This has generated less controversy but will not be a challenge for the ETS review legislation in terms of practical application and legal security for investors.
With this complicated backdrop, investors need a long term vision about where and how they can invest in energy-intensive production.
Challenges for business and governments: Fostering innovation for climate change technologies
The fight against climate change requires a change in thinking about how companies, governments and citizens act in a number of fields. For instance, energy efficiency needs to be more than a buzzword; it should be followed through. At the same time companies can contribute a lot to climate change through innovation. Some might argue that an EU climate change policy, if wisely thought through, could actually foster innovation by companies and give them a technological edge on world markets.
For instance, the chemicals industry is a big creator of energy efficient materials for the housing sector and for other industrial sectors. Similarly, the steel industry has developed new types of steel products that are much lighter and that can be used to reduce the weight and hence fuel consumption of automobiles, for instance. Energy companies are also pushing the innovation envelope in terms of energy efficiency and emissions reductions. Companies are very much part of the climate change solution – not the problem.
Governments can encourage innovation through funding for big projects like carbon sequestration or through policies that encourage rather than hamper innovation. President Barroso has called for the creation of a European Institute of Technology to bring together business and government to develop those innovative technologies. However, there are also concerns that the EU is not doing enough to encourage innovation in comparison with the US for example. This could lead to a situation where US industries gain the upper hand in technological development thanks to help for their government.
Commissioner Mandelson has also proposed the elimination of tariffs on “environmental goods” to reduce the cost of, for instance, energy efficient products. However, it is important to ensure that such measures treat all goods that provide an environmental benefit equally rather than introducing discrimination between similar products. Another key trade issue is international standards for energy efficient and low carbon products which should foster trade in those products and avoid creating non-tariff barriers or locking in out of date technologies.
- How can business leaders reconcile the need to make your company grow while operating in a more carbon-constrained European system?
- Emerging countries like China or India face a lot of challenges – ranging from poverty alleviation, the quest for economic growth and sustainable development. Can we expect these countries to prioritise climate change mitigation – which incurs costs – over other priorities like economic growth?
- One of the key issues associated with climate change mitigations is energy efficiency – or the lack thereof – which can be driven by energy subsidisation policies. We know for instance, that Russia uses dual pricing of energy and that there is no real market for energy in China due to government intervention. We also know that these energy subsidies favour energy intensive industries in those countries. Is there more work needed here to address a combined trade and climate change issue?
- Sticking to the energy issue, we know that abundant energy resources such as coal or oil from tar sands are available, but they are very carbon-intensive. Are there ways to use this energy without making a huge carbon footprint?
- In addition to competitiveness issues, there are concerns over free competition linked to climate policies. For instance, some argue that electricity prices have been influenced by the ETS in Europe to the detriment of large power users. Similarly, there are concerns that sectoral agreements on climate change could lead to anti-competitive practices. Are the risks of anti-competitive behaviour linked to climate change policies exaggerated or real?
- International trade negotiations to remove tariffs ‘environmental goods’ have not proceeded smoothly because of disagreements over the criteria used to select the goods. For instance, some might argue that tariffs on bio-ethanol should be eliminated but the EU opposes this. How can we liberalise trade in ‘environmental goods’ in an objective manner?