Emissions trading won't hurt industry but won't reduce carbon either
A report by the Carbon Trust has found that, contrary to a lot of business belief, the EU emissions trading scheme (EU ETS) will not damage the competitiveness of British industry and that virtually all sectors will be able to maintain profits.However, the report questions the ability of the EU ETS to actually lower carbon emissions.
Professor Michael Grubb, Director of Policy at the Carbon Trust, said: "UK industry has been very concerned that the EU ETS will cause British business to lose out due to global competition, or because of differences in national allocation plans (NAPS) within Europe. In contrast to this, our study reveals that most sectors will not find it hard, at a minimum, to maintain current levels of profitability once the scheme is in place, and several could gain."
Industry groups have repeatedly voiced concerns about emissions trading. In January this year the Engineering Employers Federation (EEF) claimed the scheme would lead to rises in wholesale electricity prices of 80% (see related story) by 2010, and were joined by the Chemical Industries Association (see related story) later in the year, who said the scheme would push up the cost of manufacturing.
The Carbon Trust examined the impact of the EU ETS on five different UK sectors: electricity, cement, paper (newsprint), steel and aluminium (smelting). The analysis involved calculations of the price rises required to maintain profits across a range of carbon price scenarios representing stages of EU ETS development over time.
The study found that virtually all UK sectors, with the exception of aluminium, have the potential to maintain or even increase profits. This is due to the fact that only a small portion of the EU ETS-related increase in marginal production costs needs to be passed through to maintain current levels of profitability as they receive allocations covering most of their direct emissions. This means that sector average costs rise by far less than their marginal cost, which is generally the biggest influence on prices. It is this difference that creates the theoretical potential for profit.
A spokesperson for the EEF told edie that he welcomed this report as it points out that the benefits will only be realised if all NAPs are the same across Europe.
"We're not disagreeing with the Carbon Trust report, they're saying the same as us but have just put it differently. At the moment NAPs appear far weaker across Europe than they do in the UK and we're worried about how long the Commission has to examine them before implementation in the new year," he said.
In addition, the Carbon Trust study raises concerns about the effectiveness of the EU ETS. Professor Grubb said: "Overall, NAPs across the EU are currently too weak to drive significant carbon abatement activity. This means the scheme will fail to deliver against its objective of helping business to cost-effectively reduce their carbon emissions, consistent with the EU's and member states' commitments."
"Weak NAPs will also fail to kick-start the required long-term process of change, leaving companies potentially facing much sharper cutbacks and much higher carbon prices during later stages of the EU ETS and exposing them to considerable risk - something the UK NAP avoids. It's crucial for all of European industry, as well as the fight against climate change, that the EU ensures equally strong NAPs across all countries from the start," he concluded.
By David Hopkins