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Carbon Leakage and Competitiveness of Cement and Steel Industries Under the EU ETS: Much Ado About Nothing

Abstract:
In a world of uneven climate policies, concerns about carbon leakage and competitiveness for heavy industries are the main arguments against the implementation of ambitious climate policies. In this paper we investigate a potential competitiveness-driven operational carbon leakage due to the European Union Emissions Trading scheme (EU ETS). We focus on two energy-intensive sectors, cement and steel, and phases I and II of the EU ETS. From a simple analytical model, we derive an equation linking net imports of cement and steel to local and foreign demand along with carbon price. We then econometrically estimate this relation both with ARIMA regression and Prais-Winsten estimation, finding that local and foreign demand are robust drivers of trade flows. We find no significant effect of the carbon price on net imports of steel and cement. We conclude that there is no evidence of carbon leakage in these sectors, at least in the short run.

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Energy Specializations: Energy Investment and Finance – Other; Energy and the Economy – Other; Energy and the Environment – Policy and Regulation; Energy and the Environment – Environmental Market Design; Energy and the Environment – Climate Change and Greenhouse Gases

JEL Codes:
G39 - Corporate Finance and Governance: Other
Q49 - Energy: Other
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
Q54 - Climate; Natural Disasters and Their Management; Global Warming

Keywords: EU ETS, Competitiveness, Carbon leakage, EITE industries, ARIMA, Prais-Winsten

DOI: 10.5547/01956574.37.3.fbra

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Published in Volume 37, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.