Understanding the Competitiveness Implications of Future Phases of EU ETS on the Industrial Sectors

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10044.pdf Non technical summaryDrawing on specific examples from products and subsectors within the EU ETS, this paper empirically tests to what extent those sectors are able to adjust their output prices when facing an input price change. The pass-through ability of sectors with respect to country-or regionspecific input prices should serve as an indication of the pass-through ability of carbon costs by firms. While the focus of the study lies on estimating pass-through relationships in selected sectors of the UK economy, the advanced econometric methods, particularly related to the asymmetric price transmission, are applied. The latter means the ability of producers to differently pass on positive and negative input price shocks to the consumers. Our results provide new insights into the debate on the ability of pass-through of costs generated by the EU Emissions Trading Scheme. They show that the UK sectors are not capable to completely pass-through their costs into output prices, with the exception of UK ceramic goods. Das Wichtigste in Kürze Abstract. In making key decisions for the future phases of the European Union EmissionsTrading Scheme (EU ETS), policy makers need to fully understand the competitiveness implications of these decisions on industrial sectors. In this paper, we conduct an empirical analysis of cost pass-through ability of producers of selected products within the sectors refineries, glass, chemicals and ceramics of the UK economy. Our results provide new insights into the debate on the ability of pass-through of costs generated by the EU ETS. They suggest that some of the sectors analysed have the ability to pass-through a portion of their carbon costs to the consumers: The UK sectors are not capable to completely pass-through their costs into output prices, with the exception of UK ceramic goods.JEL Classification: C22, D40, H23

The effects and side‐effects of the EU emissions trading scheme

“…Yet using innovative methods to overcome data availability constraints, econometric studies on a variety of industrial sectors have also emerged in recent years and report positive cost-pass through rates for some sectors including cement, steel, plastic and some chemicals. 62,64 Here again, the impact on the pass-through is determined by the interplay of individual effects working in different directions; thus cost-pass through behavior differ across sectors and products in terms of both asymmetry (impacts of ascending and descending EUA price) 65 and dynamics (time-lags present in cost pass-through). 61,63 The findings of these studies on the EU ETS are in line with similar studies that investigate industrial sectors' cost pass through capabilities in other policy or geographical contexts.…”

Impacts of Carbon Prices on Indicators of Competitiveness

“…However, even for the extreme cases of perfect competition and monopoly, a range of pass-through rates is possible, complicating ex ante predictions of pass-through (RBB Economics, 2014). For example, for firms operating in a perfectly competitive market and selling output domestically without import competition from countries without carbon costs, one should expect 100% or full cost pass-through to occur, since costs have nowhere to go but into output prices (Oberndorfer et al, 2010). 4 In contrast, if a sector competes internationally and has to meet world prices, suppliers may have to absorb parts (other parts might be offset by nominal exchange rate changes or reductions in other taxes) or the entire carbon price, which may lead to economic losses and may over time translate into plant closures.…”

“…This implies that European refineries at large have been strongly benefitting from the allocation of free allowances. Linking input to output prices, Oberndorfer et al (2010) empirically analyse the carbon cost pass-through ability of selected products 14 within the UK refinery, glass, chemicals and ceramics sector using weekly price data. Their estimates suggest that up to 50% of energy price increases are passed through to retail consumers of diesel and up to 75% are passed through to retail consumers of gasoline over five weeks.…”

Carbon markets: a historical overview

“…It was estimated that UK power companies would earn an additional £800 million (€930 billion) per year in Phase 1,56 and power companies in Belgium, France, Germany, and the Netherlands earned between €4.5 billion and €13.5 billion in windfall profits in a ‘representative’ year 57. Several studies also show that even industrial sectors of the economy are marking up their prices and earning windfall profits,58–60 and estimates suggest that the 10 largest beneficiaries (iron, steel, and cement companies) are making €4.1 billion in profits from the EU ETS in Phase 2 61. It is worth noting that this effect of grandfathering was understood before the EU ETS directive was adopted,62 and as we have seen, it is by no means unprecedented that a few big firms make large profits from emissions trading schemes (as with the EPA's early trading provisions and the UK ETS).…”