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CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering versus output-based allocation

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  • D. Demailly

    (EHESS - École des hautes études en sciences sociales)

  • P. Quirion

    () (EHESS - École des hautes études en sciences sociales)

Abstract

A recurring concern raised by the European GHG Emissions Trading Scheme (ETS) is the fear of losses to EU industry through competition: both loss in domestic production and loss in profits. This article analyses how production and profits in the European cement industry may be affected by different approaches to the allocation of emissions allowances. We analyse two contrasting methods for the allocation of free allowances. With 'grandfathering', the number of allowances a firm gets is independent of its current behaviour. With 'output-based allocation', the number of allowances is proportional to the firm's current production level. Whereas almost all the quantitative assessments of the EU ETS assume grandfathering, the real allocation methods used by Member States, notably because of the updating every 5 years and of the special provisions for new plants and plant closings, stand somewhere between these two polar extremes. We study the impacts of these two contrasting allocation methods by linking a detailed trade model of homogeneous products with high transportation costs (GEO) with a bottom-up model of the cement industry (CEMSIM). The two allocation approaches have very different impacts on competitiveness and emissions abatements. Grandfathering 50% of past emissions to cement producers is enough to maintain aggregate profitability (EBITDA) at its business-as-usual level, but with significant production losses and CO2 leakage. For an output-based allocation over 75% of historic unitary (tCO2/tonnecement) emissions, the impact on production levels and EBITDA is insignificant, abatement in the EU is much lower, but there is almost no leakage. Policy makers need to recognize to what extent different allocation approaches may change the impacts of emissions trading, and adopt approaches accordingly. © 2006 Earthscan.

Suggested Citation

  • D. Demailly & P. Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering versus output-based allocation," Post-Print hal-00719269, HAL.
  • Handle: RePEc:hal:journl:hal-00719269
    Note: View the original document on HAL open archive server: https://hal-enpc.archives-ouvertes.fr/hal-00719269
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    1. Gernot Klepper & Sonja Peterson, 2006. "Emissions Trading, CDM, JI, and More: The Climate Strategy of the EU," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-26.
    2. Gernot Klepper & Sonja Peterson, 2004. "The EU Emissions Trading Scheme. Allowance Prices, Trade Flows, Competitiveness Effects," Working Papers 2004.49, Fondazione Eni Enrico Mattei.
    3. Alain Bernard & Marc Vielle & Laurent Viguier, 2005. "Premières simulations de la directive européenne sur les quotas d'émission avec le modèle GEMINI-E3," Economie & Prévision, La Documentation Française, vol. 0(3), pages 171-196.
    4. Klepper, Gernot & Peterson, Sonja, 2004. "The EU emissions trading scheme allowance prices, trade flows and competitiveness effects," Open Access Publications from Kiel Institute for the World Economy 3270, Kiel Institute for the World Economy (IfW).
    5. Quirion Philippe & Jean Charles Hourcade, 2004. "Does the CO2 emission trading directive threaten the competitiveness of European industry? Quantification and comparison to exchange rates fluctuations," Post-Print hal-00643411, HAL.
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