Climate Policy and Carbon Leakage

This report explores the effects of the European Union emissions trading scheme on the aluminium sector (i.e. competitiveness loss and carbon leakage). With its very high electricity intensity, primary aluminium stands out in the heavy industry picture: a sector whose emissions are not capped in the present EU ETS, European aluminium smelters still stand to lose profit margins and, possibly, market shares, as electricity prices increase following CO2 caps on generators’ emissions – the famous pass-through of CO2 prices into electricity prices. The analysis includes a method of quantification of this issue, based on two indicators: profit margins and trade flows. As the European Union is at the forefront of such policy, the paper provides policy messages to all countries on how trade exposed energy-intensive industries can be "moved" by carbon constraint. This also is a contentious topic in Australia, Japan, New Zealand, and the United States, where ambitious climate policies – including cap-and-trade systems – are currently debated.