How to stay competitive while reducing carbon leakage: A policy analysis from the steel sector in the EU

This study addresses the issue of carbon leakage and international competitiveness of the European energy‐intensive industries, with a focus on the European steel industry. The study shows several ways in which the European steel sector can be incentivised and supported to improve its energy and material consumption, reduce dependency on fossil fuels technologies and invest in innovative technologies and products which in the long term, would reduce carbon costs as part of the production costs and improve international competitiveness. The study finds that due to the complexity of the steel sector an one‐solution‐fits‐all approach is not the right approach. The study recommends tailored consultation processes with each industry individually that involve various experts in order to guarantee a balanced representation of interests to better understand and address subsectoral differences. The study also recommends the redirection of revenues from the sale of emissions allowances into measures supporting the industry to invest in abatement technologies in order to reduce the industry’s carbon costs while supporting research and innovation.

Attachment: 

Citation: 

Turcea, Ioana; Kalfagianni, Agni, 2015. How to stay competitive while reducing carbon leakage: A policy analysis from the steel sector in the EU. CECILIA2050 WP5 Deliverable 5.3a. Amsterdam: Institute for Environmental Studies, VU University Amsterdam.

Funding: 

European Commission

Authors: 

Ioana Turcea, Institute for Environmental Studies, VU University Amsterdam, Agni Kalfagianni, Institute for Environmental Studies, VU University Amsterdam

Year of publication: 

2015

Number of pages: 

118

Table of contents: 

1

Executive summary

8

2

Introduction

8

3

Conceptual framework

10

3.1

Definitions of concepts

10

3.1.1

Carbon leakage

10

3.1.2

Channels of carbon leakage

12

3.1.3

Competitiveness

12

3.1.4

Defining energy-intensive industries – focus on the steel sector

13

3.2

Technological innovation

13

3.3

Evaluation criteria and indicators for assessing policy options

15

3.3.1

Environmental effectiveness

16

3.3.2

Dynamic efficiency

18

3.3.3

Political feasibility

20

3.3.4

Legal feasibility

22

3.4

Concluding remarks

23

4

Carbon leakage and competitiveness aspects in the European steel sector

24

4.1

The policy framework for assessing carbon leakage risk at EU level - focus on the steel sector

24

4.2

Carbon leakage risk for the European steel sector

26

4.2.1

Carbon costs

26

4.2.1.1

Direct carbon costs

26

4.2.1.2

Indirect carbon costs as part of the energy costs

28

4.2.2

Trade intensity

29

4.2.2.1

Direct trade of steel

30

4.2.2.2

Indirect trade intensity – trade of products containing steel

30

4.3

The carbon leakage risk and competitiveness arguments in the European steel sector

30

4.4

Rethinking competitiveness - steel potential for innovation, a value-chain perspective

34

5

Methodology

35

6

Results: Assessment of policy options

38

6.1

Evaluating current measures for carbon leakage protection taken by the EU

39

6.1.1

Free allocation for emissions costs

39

6.1.1.1

Environmental effectiveness

41

6.1.1.2

Dynamic efficiency

41

6.1.1.3

Political feasibility

42

6.1.1.4

Legal feasibility

43

6.1.2

Compensations for electricity costs

44

6.1.2.1

Environmental effectiveness

45

6.1.2.2

Dynamic efficiency

47

6.1.2.3

Political feasibility

47

6.1.2.4

Legal feasibility

47

6.2

Redesigning current measures to induce more technological innovation

49

6.2.1

Redesigning free allocation to induce more innovation

49

6.2.1.1

Environmental effectiveness

49

6.2.1.2

Dynamic efficiency

50

6.2.1.3

Political feasibility

50

6.2.1.4

Legal feasibility

51

6.1.1

Redesigning compensations for electricity costs to induce more technological innovation

53

6.2.2.1

Environmental effectiveness

54

6.2.2.2

Dynamic efficiency

55

6.2.2.3

Political feasibility

55

6.2.2.4

Legal feasibility

56

6.3

More support to the European industrial innovation

58

6.3.1

Environmental effectiveness

60

6.3.2

Dynamic efficiency

61

6.3.3

Political feasibility

62

6.3.4

Legal feasibility

64

6.4

Policies including third countries – Border carbon adjustment measures

65

6.4.1

Environmental effectiveness

66

6.4.2

Dynamic efficiency

66

6.4.3

Political feasibility

67

6.4.4

Legal feasibility

67

 

Border carbon adjustment measures

68

7

Conclusion and recommendations

68

8

References

71

9

Annexes

81

9.1

Annex 1 – Definitions of carbon leakage

81

9.2

Annex 2 – Data on energy and carbon costs in the European steel industry

83

9.3

Annex 3 – Technological production paths in the European steel sector

88

9.4

Annex 4 – List of documents consulted representing main policy and legislative documents of the European Commission and documents for the position of Eurofer

91

9.5

Annex 5 – List of notes from the workshops on carbon leakage on the aspects mentioned about carbon leakage and technological innovation

94

9.6

Annex 6 – List of interviews and questionnaires

100