Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing Mechanisms

The policy brief argues that current carbon pricing mechanisms, which use free allowances to prevent carbon leakage in industrial sectors, eliminate the price signal for mitigation beyond primary production efficiency. To address this, the authors propose 'Inclusion of Consumption,' where a consumption charge is levied on carbon-intensive materials (such as steel, aluminum, and clinker) based on benchmark emission values and the carbon price. This charge would apply to all domestic consumption regardless of origin, making it compatible with WTO law. The mechanism would use duty suspension arrangements to track materials through the value chain, with the charge becoming due only when the good is released for consumption. The brief notes precedents in Asia (South Korea, China, Tokyo) regarding electricity consumption and discusses potential implementation in Europe and the United States.

• Current leakage protection measures, such as free allowance allocation and tax exemptions, remove the carbon price signal for most of the value chain, limiting mitigation to efficiency improvements in primary production. In the cement and steel sectors, these efficiency improvements only account for 10% to 20% of the emission reduction potential.
• The proposed 'Inclusion of Consumption' scheme combines benchmark-based free allowance allocation for producers to avoid leakage with a consumption charge levied per ton of carbon-intensive material consumed, calculated by multiplying weight by a benchmark emissions value and the carbon price.
• The consumption charge is designed to be non-discriminatory by applying the same benchmark rate regardless of the material's origin or production process, which the authors argue ensures compatibility with World Trade Organization (WTO) law.
• The mechanism would be implemented using duty suspension arrangements, where licensed entities move products under suspension and the charge is only paid when the good is released for consumption or if a firm opts out of the licensing system.
• Inclusion of Consumption is intended to improve the business case for breakthrough technologies like Carbon Capture and Storage (CCS) or Carbon Capture and Use (CCU) by allowing for higher carbon prices and avoiding the need for politically difficult cross-subsidies.
• Precedents for including consumption in carbon pricing exist in the Republic of Korea, Tokyo, and Chinese provincial pilot schemes, specifically regarding the inclusion of electricity consumption to circumvent government control of electricity prices.

APA

Neuhoff, K., Acworth, W., Barrett, J., Owen, A., Fischer, C., Munnings, C., Ismer, R., Kim, Y. G., Pauliuk, S., Wood, R., Sartor, O., Sterner, T., Xiliang, Z., Zetterberg, L., & Roth, S. (2015). Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing Mechanisms. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2015/05/Policy-Brief-IoC-of-Carbon-Intensive-Commodities1.pdf

Chicago

Neuhoff, Karsten, William Acworth, John Barrett, Anne Owen, Carolyn Fischer, Clayton Munnings, Roland Ismer, et al. Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing Mechanisms. Climate Strategies, 2015. https://climatestrategies.org/wp-content/uploads/2015/05/Policy-Brief-IoC-of-Carbon-Intensive-Commodities1.pdf.

Wikipedia

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BibTeX

@techreport{neuhoff2015inclusion, author = {Neuhoff, Karsten and Acworth, William and Barrett, John and Owen, Anne and Fischer, Carolyn and Munnings, Clayton and Ismer, Roland and Kim, Yong Gun and Pauliuk, Stefan and Wood, Richard and Sartor, Oliver and Sterner, Thomas and Xiliang, Zhang and Zetterberg, Lars and Roth, Susanna}, title = {{Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing Mechanisms}}, institution = {Climate Strategies}, year = {2015}, month = may, url = {https://climatestrategies.org/wp-content/uploads/2015/05/Policy-Brief-IoC-of-Carbon-Intensive-Commodities1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }