Study Finds Cap-and-Trade Did Not Cause Business Flight from EU (but is no vindication of Kyoto-style policy)

by Marlo Lewis on November 1, 2013

in Blog, Features

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A study by Netherlands-based consulting firm Ecorys finds that during 2005-2012, no EU firms relocated overseas to avoid costs associated with the European emissions trading system (ETS).

Note: The study does not spin this finding as evidence that carbon regulation is good for business or poses no risks to EU economies.

Why haven’t firms moved out of Europe to avoid the higher costs imposed by the ETS?

The main reason is simply that the direct costs of the ETS have been “very limited.” According to a Greenwire article on the study, “emission allowances this year slumped to a record low of $3.36 a metric ton in April amid a record surplus of permits due to the global recession.”  For perspective, that works out to gasoline tax of 3.3 cents per gallon.

Permit prices were low because allocations were higher than required to meet projected demand – and then demand plummeted due to the recession and “lower production.”

Reducing costs even further is the fact that “most allowances were allocated to installations for free.”

A second reason the ETS did not trigger a business exodus is that relocating a company is itself costly. The ETS increased electricity prices, and this was “quite a relevant factor” to industry. However, “Most industry has heavy upfront investments (sunk costs) so they will not quickly move production. The lead-times for moving industrial production facilities are easily over 10 years.”

A third reason – strangely not mentioned in the study – is that EU governments enacted “compensation funds” to subsidize ETS-covered manufacturers and keep them from offshoring their operations.

There has been a huge shift in investment from Europe to Asia, but the ETS was a “minor factor” in such “carbon leakage,” according to the study. Investment tends to follow consumption, and developing Asia is booming.

True enough, but China and India’s growth would have been severely constrained had those countries adopted binding emission limitations. Moreover, China and India’s steadfast rejection of carbon caps or taxes enhances the expectation that those countries will remain high growth areas in coming decades.

In conclusion, although the study found “no concrete evidence” of ETS-induced business relocation during the first two compliance periods (2005-2012), the authors “think there are indications that this can change in the third period.”


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