Sectors at risk from carbon leakage
120. DEFRA indicated that reports it had commissioned
suggest that "the risk of leakage and moving overseas exists
but probably only for a limited number of sectors" (Q 83).
Phil Woolas MP (Minister of State at DEFRA) identified particular
sectors that may be at risk: aluminium, steel, cement and food
processing (Q 179) and suggested that the best prospects
of a sectoral deal were in the cement sector (Q 181).
121. The European Commission's initial analysis
suggested that, in some industries, only specific sub-sectors
are at high risk of carbon leakage. The Commission would thus
consider clinker, a carbon-intensive intermediate product involved
in the cement industry, to be particularly trade exposed rather
than the cement sector as a whole, and it would consider primary
aluminium, but probably not secondary aluminium (recycled aluminium),
to be at risk of carbon leakage (Q 371). This analysis was
supported by Professor Buzek MEP on behalf of the Polish
government, who made the point that aluminium was more at risk
of carbon leakage than cement because it was lighter to transport,
and therefore easier to import if production were to be displaced
(Q 447).
122. The British Lime Association (BLA), British
Cement Association (BCA) and the Aluminium Federation (AlFed)
all argued that their respective sectors would be subject to carbon
leakage (BLA Memorandum, p.117; BCA Memorandum, para. 14.7; AlFed
Memorandum, para.2). According to the Aluminium Federation, aluminium
was at threat "due to the global nature of the aluminium
market" while the BCA argued that cement was vulnerable due
to the large number of ports, easy access by sea and proximity
of major conurbations to maritime distribution centres. The BCA
estimated that 20 per cent auctioning in 2013 rising to 100 per
cent by 2020 would cost the UK cement industry around €1.9
billion, to which a further €0.5 billion of electricity costs
should be added.
123. Brunner Mond, a UK producer of soda ash
and sodium bicarbonate, claimed that its business too would be
susceptible to carbon leakage. According to its calculations[59],
the cost of emission permits would represent a 13 per cent increase
in its production costs which would have to be passed on in full
to their customers if the business were to remain viable. Brunner
Mond warned, however, that its ability to pass on that cost would
be highly constrained by its international competitors, most notably
in Russia and the USA (Brunner Mond Memorandum, pp119-132).
124. Other witnesses expressed scepticism about
the prospect of carbon leakage. Greenpeace emphasised that there
was little evidence to suggest that carbon leakage would be a
problem (Q 33) and urged the Commission to scrutinise properly
the claims in this regard (Q 42). The RSPB rejected this
type of concern, noting that concerns about competitiveness were
invariably offset by other factors[60]
(Memorandum, para. 6.1).
Criteria for assessing carbon
leakage
125. As regards the criteria for assessing whether
a sector was at risk from carbon leakage, the CBI considered that
the key criterion should be whether additional costs could be
passed through to customers without losing market share internationally
or undermining the sector's ability to attract investment (Q 133).
On behalf of the CBI, Mr Farrow explained that, in order
to make this assessment, one would need to consider: the cost
of carbon; what that represented as a proportion of profit margin;
value added; trade exposure of the company; significant trade
internationally; and the sensitivity of the market price. He concluded
that "this needs to be as far as possible an evidence-based
discussion".
126. DEFRA agreed that it was crucial to "have
a thorough evidence-based approach" to the assessment of
carbon leakage as the analytical work undertaken thus far had
demonstrated that the issue was very complex (Q 83). Commenting
on that analytical work, Mr Demorais (Lafarge Cement) stressed
that the modelling and analysis undertaken thus far had been historical,
and that there was a need to look at what was likely to happen
in the future (Q 134).
BOX 7
The Commission's carbon leakage assessment
criteria[59a]
