Martin Bo Hansen, Sigrud Næss-Schmidt, and Jens Sand Kirk
Nordic Council of Ministers
Increasing the price of emitting CO2 into the atmosphere is a forceful instrument. At the EU level, this is pursued through the common Emission Trading Scheme (ETS). At the national level, the ETS price is complemented by other implicit prices on CO2 such as taxes on energy consumption and levies on electricity to finance renewable energy investments. Such climate related policies are designed to reduce emissions by increasing the cost of energy intensive products and thereby lowering the demand for energy intensive products, and spurring more energy efficient innovations. However, in a globalised world with decreasing transport costs, foreign competitors from regions with less strict climate policies stand ready to serve the market with cheaper products. This means that domestic production, and the corresponding CO2 emissions, is of the risk of moving abroad as a response to higher cost of energy, either through decisions to moving production facilities abroad or simply by being outmatched and forced to close production. The phenomenon that domestic CO2 reductions may be offset by increased CO2 emissions abroad is known as carbon leakage. The Nordic Council of Ministers have commissioned Copenhagen Economics to assess the Nordic industries that are the most exposed to carbon leakage, and evaluate the characteristics of different instruments that could deal with the risk of carbon leakage. The analysis finds that leakage risks are very tangible and should be taken seriously. A specific area of interest to Nordic policy makers should be how to compensate energy intensive electricity consumers exposed to leakage risks. The analysis has been carried out during the period August 2011 - December 2011.