Allocation of CO2 allowances and competitiveness: a case study on the European iron and steel industry

Panel: Panel 5. Market-based instruments

Author:
Philippe Quirion, CIRED (CNRS/EHESS)

Abstract

We quantify the competitiveness impact from a unilateral implementation of the European Commission (COM(2001)581) allowance trading Directive proposal for the iron and steel industry. This sector is arguably the most sensitive among those covered by the proposal, since it is both highly CO2-intensive and relatively open to international trade.

Uncertainty on the costs of climate change mitigation is very high and the wide gap among results from applied models is not well understood. Rather than building another complex model, we provide a simple and transparent partial equilibrium model of the steel market and we vary both economic parameters (abatement cost, import, export and demand elasticities) and policy variables (sector coverage, allocation method). We are able to determine what results are robust or sensitive to the different parameters. Although extremely simple, our model provides stimulating results for the ongoing negotiation of the allowance trading Directive proposal.

A first strong result is that competitiveness impacts are minor. This issue is thus not a rationale for blocking or watering down the Directive.

Furthermore, a number of amendments proposed to secure industry competitiveness may in fact harm it. First, output-based allocation, put forward by a number of industrial sectors, performs worse than grandfathering and most often worse than auctioning as regards the impact on profit. Second, the opt-out clause, also endorsed by a number of industry lobbies, could harm production and profit in the iron and steel sector by one percentage point, if applied to sectors in competition with steel.