Sectors under scrutiny – Evaluation of indicators to assess the risk of carbon leakage in the UK and Germany


Working Paper 113

Abstract

One of the central debates surrounding the design of the EU Emissions Trading Scheme is the approach to addressing carbon leakage.

Correctly identifying the economic activities exposed to the risk of carbon leakage represents the first step in mitigating the risk effectively. Several metrics and methods have been proposed to separate sectors which are at risk from those which are not.

This study sets out a simple analytical framework and several indicators to measure the relative potential exposure of manufacturing sectors to emissions leakage. These indicators are applied to detailed UK and German data. This illustrates that, when applied to high quality data, simple metrics can be used to identify carbon-intensive-trade-exposed sectors.

We find that, of the 159 industrial sub-sectors examined, CO2 cost impacts are focused on a few industrial sub-sectors. The 25 highest ranking sub-sectors collectively account for around 13% of total UK CO2 emissions (from both direct and indirect energy use), 1% of total UK GDP, and 0.5% of total UK employment. For Germany, the equivalent figures are 22% of total CO2 emissions, 2% of GDP and 1% of employment.

That the vulnerable sectors account for small shares of emission, value-added and employment does not mean that their potential emissions leakage can be ignored. Rather, the focus on specific sub-sectors provides possibilities for tailored and technical solutions where leakage is a valid concern, thus improving robust economic performance and the credibility of the EU ETS as an instrument for delivering emissions reductions.

Misato Sato, Karsten Neuhoff, Verena Graichen, Katja Schumacher and Felix Matthes