Carbon Pricing and Industry Exposure

The fundamental purpose of climate policy, whether through emissions trading, taxation, or a combination of both, is to introduce an economic value on global warming gases and reduce the negative externalities of industry on the economy. The most efficient tool for accomplishing this goal is through carbon pricing, either by penalizing industry for polluting or by economically incentivizing the reduction of emissions.

As discussed previously, a cap-and-trade scheme distributes emissions allowances in the form of free allocations, auctioning, or a combination of both. From an industry perspective, auctioning of emissions allowances imposes a similar economic burden as taxation: factoring the cost of every tonne of CO - into the overall cost of production. It is a useful technique for governments to place pressure on industrial sectors in order to shift to lower carbon intensive processes and technologies. It can however be problematic for products such as PVC that rely heavily on carbon intensive upstream products and sell on the international markets, as discussed further in this section.

Apart from direct emissions from production installations, there are two important aspects to consider in the analysis of an industry's level of exposure to carbon pricing. The first relates to energy and raw materials sourcing and risks associated with upstream carbon pass-through. The second is the industry' s ability to pass-through carbon cost to the downstream consumer.

Energy-intensity13' and trade-intensity14' are useful indicators for analyzing industry exposure to carbon pricing. Figure 2.1 examines the intensity indicators for a select number of industries in the USA. The figure illustrates that while some sectors such as lime face high energy consumption, the relatively low trade intensity limits exposure to carbon price absorption. Conversely, other sectors which are both energy and trade intensive, such as nitrogenous fertilizers, experience the highest exposure to climate policy measures. Based on this high-level analysis, the basic chemical industry is one of the most exposed sectors, considering the relatively high level of energy and trade intensity compared with other sectors.

In order to further analyze carbon pricing in the chemical context, Figure 2.2 is a simplistic representation of carbon price exposure, taking into consideration the exposure to international trade markets and likelihood of carbon cost pass-through for each subset of the chemical supply chain. The figure illustrates how basic inputs of electricity and feedstock sell in the regional market while basic chemicals such as ethylene and ammonia are more exposed to international markets.

13) Energy-intensity is the sum of energy and fuel costs divided by the value of shipments.

14) Trade-intensity refers to the sum of the imports and exports divided by the sum of shipment value and imports.

Figure 2.1 Energy and trade intensity for a select group of USA industries [14].

Assuming a direct correlation between exposure to international markets and carbon pass-through, the downstream chemical and sub-sector branches such as PVC, pesticides, varnishes and pharmaceuticals are considerably more exposed to trade and thus to carbon price absorption.

Although trade exposure generally increases significantly with each subsequent stage of the supply chain, the relative impact of carbon pricing to gross value added also decreases. In order to adequately assess whether an industry is financially at risk to carbon pricing measures, it is important to consider how the relative carbon cost affects gross value added or profitability of the end product. A detailed analysis of carbon pricing in the following section examines a select group of basic chemicals and sub-sector chemicals based on an analysis conducted in 2008 by Climate Strategies, a division of the Electricity Policy Research Group at Cambridge University. The analysis reveals that most chemical sectors are affected by climate policy that targets electricity and feedstock producers, and low value downstream substances such as PVC and soda ash are among the most at risk to carbon pricing [15].

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