IEA - Issues behind Competitiveness and Carbon Leakage - Focus on Heavy Industry

When climate change mitigation policy introduces a cost for some but not others within the same sector, competition among companies is distorted. The implementation of the Kyoto Protocol potentially creates such a situation as some developed country Parties to the Kyoto Protocol have binding emission reduction targets (36 countries), while developing country Parties as well as other non-Parties, have no quantified emission reduction binding targets. The introduction of domestic or regional emissions trading schemes (ETS) that cap GHG emissions for sectors whose products compete internationally (e.g. the European ETS) can also trigger such conditions. Competitiveness concerns arise when this distortion becomes significant. For some industrial activities, this could be the case, but by no means for all. The question for those designing policy today is how to ensure that the transition towards a low-carbon economy occurs with only limited carbon leakage - namely the movement of production away from jurisdictions where carbon constraints exist to jurisdictions where they do not. Nonetheless, the prevention of carbon leakage should not occur without consideration of cost (to other sectors and the economy more generally). As a start, policy-makers’ priority should be: careful measurement and analysis of the issue, along the lines of what is presented in this report. This paper explores heavy industry’s vulnerability to carbon leakage and provides a statistical method to indicate possible carbon leakage. It also assesses a number of proposed policy measures to mitigate carbon leakage based on a selection of economic and environmental criteria.