Analysis: Carbon and Fuel Price Impact on Industry Competitiveness

This literature review delves into the impact of carbon and fuel prices on industry competitiveness, examining how carbon pricing strategies affect various sectors. It begins by defining carbon pricing and its role in addressing climate change, emphasizing the principle of pricing carbon pollution to account for greenhouse gas emissions. The review then explores the effects of these prices on industry, considering factors like investment decisions, market dynamics, and the potential for carbon leakage. It presents evidence from various studies, including the UK production census and research on carbon taxes in Germany and British Columbia, to assess the actual impact on economic performance and competitiveness. Furthermore, the assignment discusses techniques to mitigate adverse effects, such as market-based incentives, tax credits, and complementary policies, including the EU ETS. The review concludes by highlighting the importance of well-designed policies and the ongoing need to address carbon leakage risks in a fragmented international landscape. The analysis underscores the importance of understanding the effects of carbon and fuel prices to support sustainable economic practices.

IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
Impact of Carbon Prices and Fuel Prices on Industry Competitiveness by Sector

1IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
Table of Contents
Literature Review.......................................................................................................................2
1. Introduction:.......................................................................................................................2
2. Carbon pricing:...................................................................................................................2
3. Impact of carbon and fuel pricing on industry competitiveness:.......................................2
4. Techniques of managing adverse effects of carbon and fuel prices on industry
competitiveness:.....................................................................................................................4
5. Summary:...........................................................................................................................5
References:.................................................................................................................................6

2IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
Literature Review
1. Introduction:
One of the most effective strategies that businesses and governments are utilising for
addressing climate change is carbon and fuel pricing. There is a simple principle, in which
price on carbon pollution is placed in order to account for the effects of greenhouse gas
emissions stemming from the economic choices undertaken by both consumers and
producers. A correct price signal for carbon would spur organisations, customers and
investors in switching preferences from emission-intensive industries, practices and processes
to climate resilient and low carbon alternatives. The current chapter would emphasise on
analysing the impact of carbon and fuel prices on industry competitiveness by sector.
2. Carbon pricing:
As defined by Ranson and Stavins (2016), carbon pricing is an instrument capturing
the external greenhouse gas emission costs like healthcare costs from droughts and heat
waves and property loss from rise in sea level and flood. Carbon pricing assists in transferring
the damage from greenhouse gas emissions to those accountable for the same along with
having the ability to avoid it.
3. Impact of carbon and fuel pricing on industry competitiveness:
The polluter pays principle supports carbon and fuel pricing and its enforcement is
meant in order to account the damage cost owing to greenhouse gas emissions and the
playing field is tilted from emission-intensive activities to low-carbon solutions. There are
few sectors that are controlled by fossil fuel production, consumption and processing and
these sectors would contract under carbon pricing (Branger and Quirion 2013). On the other
hand, investment and production decisions are affected by a variety of influential dynamics.

3IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
These primarily include product market proximity and low-cost inputs like product market
proximity, new facility construction costs, transport cost of providing main markets,
fluctuations in exchange rates, systemic business risks and labour costs (Aceee.org 2019). It
is possible to count carbon pricing on this group of factors; however, there is lack of evidence
to denote that carbon pricing is a determinant variable for the success or failure of an
organisation. For instance, data from the UK production census reveals that the initiation of
Climate Change Levy has positive effect on the intensity of energy; however, no negative
effects on economic performance or plant exit could be detected. An effect study of the
German tax on electricity enforced in 1999 on organisations in the manufacturing industry
reflected no downfall in organisational competitiveness (Climatestrategies.org 2019).
Another study conducted on British Columbia’s carbon tax identified limited effects
on sector competitiveness with the exception of two organisations in the cement industry that
failed to maintain their market share (Climatestrategies.org 2019). At present, the province is
experiencing an increasingly clean technological sector with above 200 organisations
generating projected annual revenues of $1.7 billion.
There could be several reasons behind the non-observation of carbon and fuel leakage
until date. Firstly, the carbon cost might not be significant for investment and production
decisions in contrast to other influential dynamics like the quality of institutions, staff skills,
capital availability, market proximity, tax and governance regimes. Secondly, it is possible
for the business organisations to provide response to carbon pricing by minimisation of
emissions cutting potential rise in cost of production and eventually leakage. Thirdly, the
current levels in carbon and fuel prices might be significantly lower in few jurisdictions and
the systems are new that could hardly affect decisions. Fourthly, the governments might have
utilised policy measures for restricting carbon leakage risk (Ec.europa.eu 2019).

4IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
4. Techniques of managing adverse effects of carbon and fuel prices on industry
competitiveness:
The economic effects of carbon and fuel prices on business organisations could be
managed effectively with the help of sound policies. In other words, it is the design of
policies, instead of their stringency, which presents challenges to the organisations. Offering
market-based and targeted incentives for organisations and sectors in order to minimise
emissions and invest in low-carbon, energy effective alternatives and processes, while
simultaneously eliminating subsidies for greater carbon business activities could move a long
path towards modification of the competitive landscape (Reeem.org 2019).
The other policies constitute of investment or production tax credits, accelerated
depreciation, feed-in tariffs, research and development tax credits along with loans and
business support services.
The policymakers could take into consideration complementary measures as well for
easing the transition for negatively affected organisations, regions and sectors. These
constitute of dedication of carbon revenues to regional economic growth along with
supporting for easing the transition of sectors and businesses competing globally. For
instance, the EU ETS offers free assignment of allowances to organisations in industries
exposed to fuel and carbon leakage. The policy is designed for performance of emissions so
that the top 10% performers obtain free allowances for covering the overall emissions
(Ec.europa.eu 2019). More precisely, the policy has been designed to give an ongoing
incentive for organisations for outperforming others in the sector in relation to energy
efficiency.

5IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
Source [(Carbon Pricing Leadership Coalition 2016)]
As presented in the above table, the industry of cement is the EITE sector that is
measured at the carbon leakage risk in the nations with carbon pricing, comprising the EU
ETS, the now-defunct Australian system, and California cap-and-trade system (United
Nations Climate Change 2017). A program of transitional measures was announced by the
government of Columbia in the year 2015, in order to boost the cleaner cement
manufacturing. According to the plan of the government, they are inclined towards offering
incentives over five years in order to convert the industry of cement into a lower-carbon fuel
sources and to inspire the manufacturers in the industry to make efforts to reduce the level of
emissions by adopting carbon intensity reduction objectives (Jaramillo, Giha and Torres
2009).
Carbon tax proposal of South Africa comprises tax-free thresholds of around 90% for the
EITE sectors. Though, these thresholds will be phased down ultimately in order to evade
deflation the policy of carbon by fading the pricing sign, they may offer businesses with
valued time to adopt new models of business (World Bank Group 2017).

6IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
With time, the policies of carbon pricing are anticipated to reduce the carbon leakage risk by
moving the global economy structure in approval of well-organized, low-carbon procedures
and products against the activities considered as emissions-intensive. While carbon leakage
not yet had been materialized in the noteworthy manner, issues will continue so long as
policies of carbon pricing endure to be fragmented internationally.
5. Summary:
Based on the above discussion, it could be stated that carbon pricing assists in
transferring the damage from greenhouse gas emissions to those accountable for the same
along with having the ability to avoid it. It has been analysed that carbon prices and fuel
prices have effect on climate change; however, there has been lack of evidence to prove that
they have unfavourable effect on economic performance. Moreover, these prices are not
taken into consideration before, since they are not significant for investment and production
decisions. Therefore, certain techniques have been recommended to minimise the adverse
impact of carbon prices and fuel prices on industry competitiveness by sector.

7IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
References:
Aceee.org., 2019. [online] Available at:
https://aceee.org/files/proceedings/2016/data/papers/9_49.pdf [Accessed 1 Apr. 2019].
Climatestrategies.org., 2019. [online] Available at:
http://climatestrategies.org/wp-content/uploads/2009/10/cs-leakage-final-230909.pdf
[Accessed 1 Apr. 2019].
Climatestrategies.org., 2019. [online] Available at:
https://climatestrategies.org/wp-content/uploads/2012/11/cs-synthesis-report-leakage-
competitiveness-final.pdf [Accessed 1 Apr. 2019].
Ec.europa.eu., 2019. [online] Available at:
http://ec.europa.eu/smart-regulation/impact/ia_carried_out/docs/ia_2009/
sec_2009_1710_en.pdf [Accessed 1 Apr. 2019].
Ranson, M. and Stavins, R.N., 2016. Linkage of greenhouse gas emissions trading systems:
learning from experience. Climate Policy, 16(3), pp.284-300.
Reeem.org., 2019. [online] Available at:
http://www.reeem.org/wp-content/uploads/2018/12/3.2-Case-Study-on-Carbon-Leakage-and-
Competitiveness.pdf [Accessed 1 Apr. 2019].
Carbon Pricing Leadership Coalition. 2016. What is the Impact of Carbon Pricing on
Competitiveness? [online] Available at:
http://pubdocs.worldbank.org/en/759561467228928508/CPLC-Competitiveness-print2.pdf
[Accessed 4 Apr. 2019]

8IMPACT OF CARBON PRICES AND FUEL PRICES ON INDUSTRY COMPETITIVENESS
United Nations Climate Change. 2017. Bigger Climate Action Emerging in Cement Industry
[online] Available at: https://unfccc.int/news/bigger-climate-action-emerging-in-cement-
industry [Accessed 4 Apr. 2019]
Jaramillo, S., Giha, Y., and Torres, P. 2009. Transitional Justice and DDR: The Case of
Colombia [online] Available at: https://www.ictj.org/sites/default/files/ICTJ-DDR-Colombia-
CaseStudy-2009-English.pdf [Accessed 4 Apr. 2019]
Branger, F., and Quirion, P. 2013. Carbon leakage and competitiveness of cement and steel
industries under the EU ETS: much ado about nothing [online] Available at:
https://www.researchgate.net/publication/259562193_Carbon_leakage_and_competitiveness_
of_cement_and_steel_industries_under_the_EU_ETS_much_ado_about_nothing [Accessed 4
Apr. 2019]
World Bank Group. 2017. Carbon Tax Guide A Handbook for Policy Makers [online]
Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/26300/Carbon
%20Tax%20Guide%20-%20Appendix%20web%20FINAL.pdf?sequence=7&isAllowed=y
[Accessed 4 Apr. 2019]