Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts

The report assesses how the EU ETS affects industrial competitiveness, identifying that while most sectors can profit in the short term through free allowances and cost pass-through, a small number of carbon-intensive subsectors face significant risks. Using UK and German data, the authors develop 'Value at Stake' indicators to screen for exposed activities. The analysis concludes that leakage concerns are concentrated in a few subsectors, particularly cement and blast furnace steel, where high direct emissions and international tradeability create vulnerability. The report argues that free allocation can mitigate these risks but may create perverse incentives, suggesting that targeted policies or harmonized allocation across EU Member States are necessary to maintain economic performance while achieving emission reductions.

• A screening of 159 manufacturing subsectors using UK data reveals that competitiveness impacts are concentrated in a small fraction of industrial activities; only 23 sectors exceed a threshold of either 2% indirect or 4% cumulative cost increase relative to gross value added (GVA).
• Cement and Basic Iron and Steel are identified as the two subsectors with the highest maximum impact on costs relative to value added.
• The 23 potentially exposed subsectors are relatively small in terms of economic weight, representing approximately 1.1% of UK GDP and 0.5% of employment, although they contribute 11% of total UK GHG emissions through direct emissions and 3% through indirect emissions.
• In the cement sector, international pressure is currently low due to high transport costs and the localized nature of demand, though leakage risk is specifically tied to the production of clinker, which has lower transport barriers than finished cement.
• The steel sector faces moderate international pressure, particularly for flat products produced via the blast oxygen furnace (BOF) route, which are more sensitive to international competition than electric arc furnace (EAF) products.
• Free allowance allocation can lead to significant profits for the cement and steel sectors if firms pass the opportunity costs of those allowances through to product prices.
• Continued free allocation of allowances may create perverse incentives, such as compensating producers of carbon-intensive goods for losses caused by a shift in demand toward lower-carbon products, thereby reducing the overall economic efficiency of the EU ETS.
• The report argues that 'tipping points'—specific CO2 prices that trigger sudden, massive shifts in trade or relocation—cannot be reliably identified because they depend on uncertain and evolving factors like transport costs, product differentiation, and global demand-supply balances.
• For the refining sector, the risk of production relocation is considered improbable due to high sunk costs, the necessity of locating facilities near demand, and the logistical challenges of developing new transport infrastructure for refined products.
• High trade intensity between EU Member States suggests that allocation methodologies and volumes must be harmonized across the region to avoid internal market distortions.

APA

Hourcade, J.-C., Demailly, D., Neuhoff, K., Sato, M., Grubb, M., Matthes, F., & Graichen, V. (2007). Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/1-climatestrategies-competitiveness-final-report-140108.pdf

Chicago

Hourcade, Jean-Charles, Damien Demailly, Karsten Neuhoff, Misato Sato, Michael Grubb, Felix Matthes, and Verena Graichen. Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts. Climate Strategies, 2007. https://climatestrategies.org/wp-content/uploads/2014/11/1-climatestrategies-competitiveness-final-report-140108.pdf.

Wikipedia

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BibTeX

@techreport{hourcade2007differentiation, author = {Hourcade, Jean-Charles and Demailly, Damien and Neuhoff, Karsten and Sato, Misato and Grubb, Michael and Matthes, Felix and Graichen, Verena}, title = {{Differentiation and Dynamics of EU ETS Industrial Competitiveness Impacts}}, institution = {Climate Strategies}, year = {2007}, url = {https://climatestrategies.org/wp-content/uploads/2014/11/1-climatestrategies-competitiveness-final-report-140108.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }