Including consumption of bulk materials into the EU-ETS: A way to re-establish incentives for material efficiency and to avoid carbon leakage

Panel: 1. Policies and programmes

Authors:
Karsten Neuhoff, DIW, Germany
Roland Ismer, Uni Erlangen-Nürnberg, Germany
Vera Zipperer, DIW, Germany
Stefan Pauliuk, Faculty for Environment and Natural Resources, University of Freiburg, Germany

Abstract

In a world without a global homogenous market for carbon emissions allowances the price of GHG emissions varies between regions. The existence of several regional carbon regimes raises concerns about carbon leakage through a relocation of the production of carbon-intensive commodities to regions with lower carbon prices. To address these concerns allowances are currently allocated for free to sectors with high leakage risk. While free allocation can serve as leakage protection, it also mutes the carbon price signal along the value chain and incentives for innovation, substitution and material efficiency are lost.

The incentives for reducing GHG emissions in material production, however, can be re-activated by including the consumption of carbon-intensive commodities into emissions trading. A charge would be imposed on the consumption of these commodities within one territory irrespective of their origin. It reflects the carbon costs associated with the production of the material at a benchmark technology.

This novel approach is called 'inclusion of consumption' (IoC). It represents a shift of the burden of the carbon charge from the producers to the final consumers of steel-, cement-, and aluminium-containing commodities. IoC is modeled after the excise taxes for tobacco, fuel, and alcohol, but differs in the details. IoC is compatible with prevailing WTO regulations and agreements. Revenues collected from IoC could be fed into a trust fund for industrial efficiency improvement and technology development within the region where the charge is levied.

We explain the approach and demonstrate how it could be implemented and administered as part of the EU Emissions Trading System. We also present an estimate of the potential revenues and show which commodities should be monitored when traded across the borders of the EU-ETS realm.