oregon sectoral competitiveness under statewide carbon pricing carbon leakage sta… · oregon...

Oregon Sectoral Competitiveness under Statewide Carbon Pricing

Our Vision:“A world where economic and scientific insights create enduring value”

Stakeholder Briefing PackJuly 2018

Key terms

Oregon EITE carbon leakage and competitiveness study - stakeholder briefing pack 2

Term Definition

Carbon leakageAn increase in global emissions induced by a domestic carbon pricing instrument inducing production to shift to jurisdictions with less stringent pricing policies. It is measured as the increase in extra-territorial emissions divided by the reduction in domestic emissions

Trade exposureTrade exposure reflects a sector’s dependence on trade relative to the jurisdiction’s domestic market. This is often calculated as total trade as a proportion of the total jurisdiction’s domestic market: [(Imports + Exports)/(Imports + Production)]

Emissions intensity This captures a sector’s exposure to a carbon pricing cost increase. It is usually measured as emissions per million dollars of revenue (usually gross value added)

Emissions intensive trade exposed (EITE) industries

These are industries identified as potentially at risk of carbon leakage or significant competitiveness impacts and may require support mechanisms to avoid adverse competitiveness impacts

Content

Oregon EITE carbon leakage study - stakeholder briefing pack 3

1. Purpose of work

2. Introduction to Vivid Economics and similar case studies undertaken

3. Example stakeholder questions

4. Definitions of important terms

1Purpose

Three activities will help the State of Oregon understand and minimise the carbon leakage risk and competitiveness impacts of a potential carbon pricing instrument

Oregon EITE carbon leakage study - stakeholder briefing pack

1. Identify sectors and facilities at risk of carbon leakage and adverse competitiveness impacts− gather data to explore quantitatively and engage with stakeholders to qualitatively investigate sectors

just outside EITE definitions

2. Analyse sectors vulnerable to the indirect impacts of carbon pricing− including how carbon pricing may impact electricity and gas prices, and hence impact large consumers

both in EITE sectors and non-EITE sectors

3. Provide an assessment of carbon leakage risk assessment measures and support mechanisms− outline the advantages and disadvantages of different approaches and how to address potential

distributional impacts

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Stakeholder engagement will ensure that all aspects of the project’s outputs address the risks of carbon pricing and concerns of Oregon’s industry

1Purpose

Content


1. Purpose of work




2Vivid

Economics

We are a leading strategic economic consultancy driven by the vision of putting economics to good use


A global reach

− projects in more than 30 countries, spanning 6 continents

Distinguished by our capacity to deliver in original and meaningful ways

− a track record of delivering custom solutions grounded in robust economics

− able to leverage insights and methodologies through our global network of academics

A values-driven culture

− driven by the vision of putting economics to good use

− value-creation for client, always delivered consistent with value for society

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2Vivid

Economics

We have experience with a variety of clients from diverse institutional and cultural backgrounds across a range of sectors


Governments International institutions

Not for profits Private sector

Oil and gas majors

Water + waste utilities

Financial corporations

Chemicals companies

Energy companies

$£

2Vivid

Economics

We are established leaders in the field of climate strategy


Our expertise on carbon has developed from leveraging our knowledge across the company

− We have developed frameworks of understanding that offer unique insights on carbon pricing mechanisms

− Our expertise in this area has allowed us to contribute to and shape long-term developments in climate policy

− The following slides introduce some of our expertise in five areas of focus as indicated

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5. interaction of climate and energy policies

4. modelling and impact assessment

3. implicit carbon pricing

1. carbon pricing instrument design

2. competitiveness and carbon leakage 2

Vivid Economics

We have successfully conducted stakeholder engagement on the carbon leakage and competitiveness impacts of carbon pricing in the EU, UK, Mexico and Turkey


The workshops raised awareness among stakeholdersWe wished to generate consensus on the risks of carbon pricing and how to identify EITE sectors

We explained key concepts to stakeholdersWe outlined EITE selection methodologies and shared lessons learnt from other jurisdictions

We undertook structured, private interviews with industry stakeholdersThis allowed us to gather feedback on perceptions of carbon leakage risk and other concerns

—Our knowledge of industry and the public sector ensured we achieved valued outcomes—Participants included public sector representatives & industry stakeholders

2Vivid

Economics

Case study: Measuring the competitiveness of Mexican industriesin the context of carbon pricing

Brief: The German development agency, GIZ, and the Mexicanenvironment ministry, SEMARNAT, asked us to assess thepotential competitiveness impacts and the risk of carbon leakage.

Outcomes: The project evaluated existing carbon leakage metricsand provided policy recommendations to minimise carbon leakagerisks. The final report will support the Mexican government in itsprocess to implement an emission trading scheme.

Our public sector work has assisted policymakers in understanding the theory and potential impact of carbon leakage


Case study: Carbon leakage and competitiveness impacts of carbonpricing in Turkey

Outcomes: The final report included a deep analysis of each sector,policy options and an assessment of the risk that Turkey's exportingindustries could face a border carbon adjustment if it did notimplement a carbon price.

Quantitative analyses combined with qualitative insights derived from comprehensive stakeholder engagement ground our findings in reality and ensure recommendations are pragmatic

2Vivid

Economics

Our 2015 work for the World Bank’s Partnership for Market Readiness (PMR), Carbon Leakage : Theory, Evidence and Policy Design, hasbecome the touchstone report on the topic, and we have leveraged our expertise to provide guidance to developed and emerging marketeconomies on how to address issues of carbon leakage as they arise in their national contexts.

Brief: We werecommissioned by the TurkishMinistry of Environment andUrbanisation, in conjunctionwith the PMR, to analyse thecompetitiveness impacts ofcarbon pricing, including therisk of carbon leakage.

http://www.vivideconomics.com/publications/carbon-leakage-theory-evidence-and-policy-design

Our findings have helped shape the design of carbon pricing instruments and inform government positions in multilateral negotiations


Case study: Carbon leakage in the EU ETS

Brief: The UK’s Department of Energy and Climate Change askedus to estimate exposure to carbon leakage under EU ETS Phase III.

Outcomes: Our estimates were used by DECC to engage theEuropean Commission regarding the potential exposure to carbonleakage and the appropriate design of policy responses.Industries were found to be generally capable of passing throughthe majority of carbon costs.

Our innovative work on carbon leakage includes assessments of international trade impacts and estimates of cost pass through rates

2Vivid

Economics

Case study: International Carbon Pricing Competitiveness Case Study

Brief: Environment and Climate Change Canada commissioned us toanalyse international case studies on the way EITE firms haveexperienced the transition to carbon pricing in other jurisdictions.

Outcomes: The findings will assist the design of carbon pricingpolicies in Canada by identifying the EITE sectors at risk of carbonleakage and presenting effective carbon leakage risk reductionmechanisms.

http://www.vivideconomics.com/publications/exploring-carbon-leakage-issues-under-the-eu-ets

We have also analysed carbon leakage at the facility-level and have a deep understanding of industrial processes and competitive dynamics


Case study: Analysis of benchmarking under Phase IV of the EU ETS

Brief: DECC asked us to assess the suitability of the EuropeanCommission’s proposal to change carbon leakage allocation bytightening existing product and fall-back benchmarks.

Outcomes: The findings we used by the UK government as part oftheir engagement with European policymakers in order to help shapethe design of Phase IV of the EU ETS.

our in-house models have helped private clients from over 25 industrial sectors in four continents to identify carbon leakage risk and competitiveness impacts

Case study: Assessment of carbon leakage criteria for a Europeanindustry association

Brief: We were commissioned to analyse the trade, emissionsintensity, and the cost pass-through rate in an EU industry

Outcomes: This analysis contributed to a pre-assessment ofwhether the sector meets the proposed criteria for classificationas facing a significant carbon leakage risk.

2Vivid

Economics

The key project team members are Thomas Kansy and Paul Sammon


2Vivid

Economics

Thomas Kansy – Head of Climate Strategy. He is an expert in carbon leakage and the economics of climate change. Major projects on carbon leakage, competitiveness and EITE industries include advising the governments of Turkey and Mexico on carbon leakage and competitiveness, the government of South Africa on impacts of its proposed carbon pricing instruments, and several non-public projects with international oil companies and other energy companies He was also a lead author of the State and Trends of Carbon Pricing 2016 and 2017, the Checklist on Establishing Post-2020 Emission Pathways and key reports on competitiveness and carbon leakage, including the country work in the UK, Mexico, South Africa and Turkey. He holds a Masters in Economic and Financial Research with specialisation in econometrics and a BSc in International Economic Studies from Maastricht University.

Paul Sammon –will be Project Manager. He is an expert in the areas of climate and industry competitiveness, has significant project management experience, and recently concluded projects on carbon leakage and competitiveness for Turkey and for Mexico worth over $200,000. He was a lead author of the World Bank’s Technical Paper on Carbon Leakage and the ETS Handbook and its forthcoming report on principles for integrating energy and climate policies. He is a trusted advisor to private clients including industry representative groups and a major energy company, helping them to understand the implications of environmental regulations. He holds an MSc Economic History (with distinction) from the LSE and a BA Economics with first class honours from Trinity College Dublin.

Content


1. Purpose of work




3Example

questions

Example questions on which we would appreciate stakeholder views related to market dynamics, abatement opportunities and other concerns


[xx]

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focus on a sector’s cost pass-through abilityMarket dynamics•what firms, countries and/or states are key competitors to your sector internationally and within the U.S?•are products generally sold through contracts or spot markets?•are prices in your sector uniform or is there regional variation? Relative to historical levels, how high are current prices?•what have been the profitability and capacity utilization trends in your sector recently, and what has driven these?

focus on a sector’s potential for emissions-intensity reductionsAbatement opportunities•what are the key production processes used in your sector? Are there alternative, less emissions intensive processes?•have you employed any abatement measures in recent years? Do you think further opportunities will arise in the future?•how does the sector’s emissions intensity (level and variability) compare to international producers in competitor markets?•what is the energy intensity of the sector like? Have you undertaken energy efficiency measures, or are the opportunities to do so?

additional comments or concerns not addressed previouslyOther concerns •how many people do you employ and what is the significance of your employment levels for the local community?•do you think carbon leakage risk would be more significant in your sector in terms of output change or long-term investment shift?•how much is energy consumption (electricity or natural gas) as a proportion of your costs?•what type of fuel do you use? Is electricity an option for your process? What factors have lead you to use this energy source?• what is your exposure to fuel costs? How are your products transported?

3Example

questions

Content


1. Purpose of work



4. Definitions of important terms4

Definitions

carbon leakage (emissions move to other jurisdictions)

Asymmetries in carbon pricing can negatively impact an economy’s competitiveness and result in carbon leakage


4Definitions

Carbon leakage occurs when production shifts to locations with less stringent or no carbon pricing

Thus, the carbon price could damage competitiveness while yielding little or no reduction in global emissions

There are three channels through which carbon leakage may arise, but the analysis for Oregon will focus on the first two channels


4Definitions

Output or short-term competitiveness channel

Investment or long-term competitiveness channel

Fossil fuel price channelReduction of fuel use due to more stringent regulation can lead to a reduction in the price of globallytraded fossil fuels. This reduction could lead to an increase in demand for these fuels in other jurisdictionswith less stringent regulation, leading to an increase in emissions and carbon leakage. This channel is lessimportant for Oregon in the medium term given it would require a global shift in fossil fuel usage

In the medium to long term, carbon prices can alter investment decisions between jurisdictions. Reducedinvestment in maintenance capital to sustain output levels from covered firms can lead to reducedefficiency and/or reliability and then reduced output, which could be taken up by uncovered firms. In thelonger run, this can lead to covered firms closing down and production shifting to uncovered firms.

Higher carbon emission costs can cause firms affected by carbon pricing (covered firms) to lose market share to the benefit of those not covered by carbon pricing (uncovered firms) leading to carbon leakage.

Firms have control over direct emissions, but can only reduce indirect emissions through efficient energy use or by switching energy supply


4Definitions

Direct emissions (scope 1) come from three sources:— fossil fuel combustion;— industrial processes; and— release during the extraction,

processing and delivery of fossil fuels, including leaks from industrial plants and pipelines (fugitive)

Indirect emissions (scope 2 and 3) are a consequence of a firm’s activities, but occur at sources owned or controlled by another entity, for example:— emissions generated at power plants

from a firm’s electricity consumption;

— emissions generated during the extraction and production of natural gas for use at a firm

Not covered under SB 1507

A State’s regulation of utilities can also influence power plant emissions and therefore firms’ indirect emissions

Definitions of important terms related to emissions


Term Definition

Fossil fuel natural gas, petroleum, coal, or any form of solid, liquid, or gaseous fuel derived from such material for the purpose of creating useful heat.

Emissions the release of greenhouse gases (GHGs) into the atmosphere from sources and processes in a facility, including from the combustion of transportation fuels such as natural gas, petroleum products, and natural gas liquids.

Carbon dioxide equivalent (CO2e)

CO2e is a measurement unit to indicate the global warming potential (GWP) of greenhouse gases.Carbon dioxide is the reference gas against which other greenhouse gases are measured.

Direct emissions GHG emissions from sources that are owned or controlled by the reporting entity

Indirect emissions GHG emissions that are a consequence of activities of the reporting entity, but occur at sources owned or controlled by another entity. For example emissions from electricity consumption

Combustion emissions greenhouse gas emissions occurring during the exothermic reaction of a fuel with oxygen.

Process emissions

the emissions from industrial processes (e.g., cement production, ammonia production) involving chemical or physical transformations other than fuel combustion. For example, the calcination of carbonates in a kiln during cement production or the oxidation of methane in an ammonia process results in the release of process CO2 emissions to the atmosphere.

Fugitive emissions intentional or unintentional release of GHG emissions occurring during the extraction, processing and deliveryof fossil fuels to the point of final use

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4Definitions

Definitions of important terms related to abatement and carbon leakage and competitiveness impacts *


Term DefinitionGHG emission reduction a calculated decrease in GHG emissions relative to a project baseline over a specified period of time

Offset credita credit issued for a GHG reduction or GHG removal enhancement of one metric ton of CO2e. The GHG reduction or GHG removal enhancement must be real, additional, quantifiable, permanent, verifiable, and enforceable and may only be issued for offset projects using Compliance Offset Protocols

Trade exposuretrade exposure reflects a sector’s dependence on trade relative to the jurisdiction’s domestic market. This is often calculated as total trade as a proportion of the total jurisdiction’s domestic market: [(Imports + Exports)/(Imports + Production)]

Cost pass-through ability

the extent to which firms can pass through carbon costs to consumers without a loss of market share or profit margin. Trade exposure is often used as a proxy for a firm's cost pass-through ability

Gross value added a measure of the value of goods and services produced in an industry defined as total output minus the cost of inputs and raw materials (intermediate consumption)

Emissions intensity GHG emissions per million dollars of revenue metric (usually gross value added)

Carbon leakageAn increase in global emissions induced by a domestic carbon pricing instrument inducing production to shift to jurisdictions with less stringent pricing policies. It is measured as the increase in extra-territorial emissions divided by the reduction in domestic emissions

Market share a firm's proportion of total market sales (either in terms of value or quantity of units)

Competitiveness impacts

occur if carbon prices cause competitiveness distortions which lead firms in jurisdictions with higher carbon prices to lose market share to firms in jurisdictions without (or with lower) carbon prices

4Definitions

Definitions of important terms related to carbon leakage risk reduction


Term Definition

Emissions intensive trade exposed (EITE) industries

industries identified as potentially at risk of carbon leakage or significant competitiveness impacts and may require support mechanisms to avoid adverse impacts

Allowance a tradable authorization to emit up to one metric ton of carbon dioxide equivalent in a specific period of time

Emissions intensity benchmark

a performance standard used to evaluate GHG emissions efficiency between and amongst similar facilities or operations in the same industrial sector

Output-based free allowance allocation

provides free allowance allocation assistance to firms according to a pre-determined emissions intensity benchmarks and adjusts allocations if firms change their output

4Definitions

Contact us:26-28 Ely PlaceLondonEC1N 6DT

Company Profile

Vivid Economics is a leading strategic economics consultancy with global reach. We strive to create lasting value for our clients, both in government and the private sector, and for society at large.

We are a premier consultant in the policy-commerce interface and resource and environment-intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world.

The success we bring to our clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations.

Practice areas

Climate Strategy Cities & Infrastructure Earth Observation Energy & IndustryGrowth & Development Natural ResourcesPublic & Private Finance

Thomas KansyPrincipalT: +44 (0)844 8000 254E: [email protected]

oregon sectoral competitiveness under statewide carbon pricing carbon leakage sta… · oregon...

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