EU climate policy ‘costs billions and risks jobs’

Redesigning the European Union's emissions trading system (EU ETS) would save EUR 6.7 billion of precious taxpayers' money per year and be much more effective in protecting hundreds of thousands of vital manufacturing jobs.

These are the conclusions of a six nation survey prompted by concern that manufacturers will shift business from the EU because of tougher policies to reduce industrial pollution.

In a stark message to the European Commission, around a quarter of 761 firms questioned on this by researchers at the London School of Economics (LSE) warned that relocating some activities by 2020 was a likely possibility.

The academics at the LSE’s Centre for Economic Performance say their findings show that current measures to mitigate relocation risk are poorly targeted.

For power plants and large industrial emitters that together produce some 40% of Europe’s carbon dioxide (CO2) emissions, the EU ETS sets overall emissions targets by issuing tradable emission permits.

Regulated firms need a permit for every tonne of carbon emitted. To lower the risk of relocation, the European Commission distributes a large proportion of such permits for free, effectively subsidising some firms.

This is intended to address concerns that lower carbon targets or higher taxes in one or more EU states would see businesses relocate to unregulated places, resulting in EU job losses without reducing emissions globally.

Under the third phase of the EU ETS, due to start in 2013, the European Commission plans to give free permits in sectors with either high trade-intensity or high carbon-intensity. This aims to lower relocation risks in sectors deemed to be more open to international competition for factories and jobs.

The trouble is that the CEP study finds such risks are not correlated with trade intensity and that some carbon-intensive firms receive ‘excessive’ amounts of free permits. For example, some get the equivalent of more than EUR 100,000 per employee in emission permits while others equally at risk receive none.

CEP estimates that as a result of this policy design, about 10% of jobs in firms covered by the EU ETS are at risk of relocation, corresponding to 2.1% of manufacturing employment.

For context, and on my own crude calculation, EU manufacturing currently accounts for some 28 million jobs; so 2.1% of these would be 588,000 jobs.

Based on its analysis, CEP suggests that using simple criteria to compensate firms at risk could be more effective in protecting jobs and would also save money. It finds that by implementing a more efficient allocation of the same amount of free permits as under current EU plans, job risk could be reduced to as low as 0.76% of manufacturing jobs (some 212,800 on my estimate).

Alternatively, it suggests, fewer permits could be handed out for free, thus increasing public revenue from permit auctions without increasing the risk to jobs. In the model proposed by CEP, permit distribution would be based on an index that takes into account both the carbon intensity and labour intensity of a firm.

“Reducing job risk and increasing public revenues should be a win-win strategy for governments at the best of times,” said Ralf Martin, co-author of the CEP study. “In the current economic crisis, such measures are even more imperative.”

By Robert Stokes