Potential Effects of the National Fuel Emissions Trading System on Carbon Leakage and Competitiveness

Content 

The short study was conducted in partnership with DIW Berlin as part of a framework contract with the Federal Ministry of Finance.

The study examines the effects of introducing a national emission trading system on carbon leakage, i.e. the relocation of emissions abroad due to increased domestic costs. The Fuel Emission Trading Act (Brennstoffemissionshandelsgesetz, BEHG) stipulates support measures for affected companies; however, it does not address the issue of identifying leakage risk. The aim of the study was to provide an overview of measures to determine the affected economic sectors, and to demonstrate sectors’ leakage risk applying the methodology currently used in the EU ETS.

Methods

A literature review presented and evaluated measures of carbon leakage risks which are used in the practice of emissions trading systems and discussed in the academic literature. The study addressed various measures for cost increases due to CO2 pricing and for the tradability of the products concerned. In addition, indirect measures – considering cost increases or exports along the value chain - were also discussed. Moreover, practical examples of national CO2 taxes were described and a brief overview of the possible impact on non-industrial sectors was provided.

The second part of the brief expertise quantified the extent of carbon leakage risk for industrial sectors. The quantification exercise was based on the methodology currently used in the EU emissions trading system. The share of additional CO2 costs in gross value added and trade intensity were calculated at the four digits sector level. Since emissions that are already subject to the EU emissions trading system are excluded from the national emissions trading system, these were separately identified and reported.

Data and other sources

Federal Statistical Office, Cost Structure Census (Kostenstrukturerhebung)
Federal Statistical Office, Energy Use Census (Erhebung über die Energieverwendung)
Federal Statistical Office, Investment Census in Manufacturing (Investitionserhebung der Unternehmen im verarbeitenden Gewerbe)
Federal Environmental Agency (Umweltbundesamt), Kohlendioxid-Emissionsfaktoren für die deutsche Berichterstattung atmosphärischer Emissionen 1990-2017
European Commission, DG Energy: Weekly Oil Bulletin
European Commision, DG Climate Action: EU Transaction Log
European Commission, DG Climate Action: NACE Matching Table

Results

Expected CO2 costs relative to gross value added are found to be the most promising measure to identify industries that are particularly affected by carbon leakage. Trade intensities do not help to differentiate between sectors, as trade between Germany and abroad is substantial for all sectors. Indirect approaches to measure leakage risk – considering (international) interdependencies in the value chain – are a theoretical alternative to measuring the direct impact, but their advantages are reduced in practice due to the lack of available data on a disaggregated level and the loss of replicability.

The quantitative analysis shows that carbon leakage risks from the national emissions trading system are considerably lower than in European emissions trading and are, in the industry, limited to a few sectors. The sectors most affected by national fuel emissions trading are already subject to the EU ETS. In these sectors, some companies have CO2 costs from national fuel emissions trading, others do not. The investment grants for affected companies foreseen in the Fuel Emissions Trading Act (BEHG) should be based on company-specific proven additional costs. Initial analyses indicate that yearly investments in the most affected sectors are many times higher than the potential CO2 cost increases. Therefore, compensation of the additional CO2 costs via moderate investment subsidies, for example for efficiency measures, seems possible.