Applying Carbon Pricing to the Chemical Production Chain

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Policy measures aimed at mitigating emissions generally target point sources of emissions such as the current EU ETS which covers CO2 emissions from

Figure 2.2 Exposure to carbon price absorption.

combustion installations. This section examines the direct cost and pass-through costs associated with 100% auctioning of emissions allowances for the chemical industry at each stage of the production process.

While it is unlikely that full auctioning of emission allowances is imposed on the chemical industry during the early phases of an emissions trading scheme, there are already provisions to target sectors such as power generation for auctioning because of its low level of exposure to international trade. Figure 2.3 demonstrates how the cost of carbon is applied to the gross production value under an emissions capped economy. This aspect of cost increase is referred to as the value at stake because of the diminishing gross value added relative to gross production value. This section examines how the value at stake is affected under various scenarios for a range of basic and sub-sector chemicals.

Certain aspects of the chemical industry are particularly vulnerable to cost increases attributed to carbon since the industry relies heavily on fossil fuels as feedstock and for process energy. A study conducted by the UK based Centre for Economic and Business Research (CEBR) on the impact on UK and EU chemical industry suggests that even at a carbon price of 20€ per tonne of CO2, the percentage of the chemical industry' s value at stake relative to value added could be as

Figure 2.3 Value at stake.

high as 4.7% [ 16]. While in the USA, the petrochemical manufacturing industry could see short-term cost increases of more than 4% even with a modest carbon price of 10 US$ [17].

For the purpose of this analysis, carbon pricing is applied to direct emissions from the production process as well as indirect emissions from upstream products such as electricity and naphtha with a high likelihood of carbon cost pass-through. The next section also touches on indirect impacts of carbon pricing such as competition for low carbon fuels and cost of compliance for direct emissions associated with combustion installations.

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