New carbon leakage protection for energy-intensive industry

Energy-intensive industries include the chemical, steel, cement, paper, glass, copper and aluminium industries. In Germany, around 880,000 employees earn their living in these sectors and generate more than 330 billion euros in sales annually. Germany is one of the few countries in Europe with a significant energy-intensive industry. Overall, German industry contributes around 25 per cent to the gross economic product, the European average is about 16 per cent. Germany still has relatively closed industrial value chains.

A common feature of these industries is that their products have to be manufactured with a high energy intensity and that they are in global competition. They are therefore both energy- and trade-intensive. Their products are often traded globally as so-called “bulk products”; they differ little in their product characteristics, no matter where they are produced and traded. This means that local price increases – for example owing to rising CO2 or electricity prices – can only be added to the product price to a small extent or not at all. This also means that location-specific energy costs are of crucial importance for companies and their investment and location decisions. National and regional electricity and energy costs are therefore decisive location factors along with energy policy. Trade policy also plays a key role.

In winter 2019/20, the EU Commission announced an investigation into the EU’s new carbon leakage protection regime, and plans to introduce a Carbon Border Adjustment Mechanism if necessary. In addition to this type of carbon leakage protection, there are other models that can maintain the competitiveness of energy-and electricity-intensive industries, not least the model using fixed industrial electricity prices. A carbon border adjustment mechanism would also be very complex in terms of its detail, or could be designed very differently – with impacts on the value and supply chains as well as on investment activity.

In a key issues paper, the IG BCE Foundation for Labour and the Environment discusses the advantages and disadvantages of the various models and establishes criteria for effective carbon leakage protection.

The results are expected in autumn 2020.