Carbon pricing: a side event on policy solutions for a climate friendly materials sector

By Max Behringer

Carbon pricing is considered as an important part of the reduction of GHG emissions. Most of the industrial GHG emissions are caused by the production of steel, cement and aluminum. The side event proposed to focus down on these sectors to develop carbon pricing tools. Right now, we have taxes and emission permits as main tools for carbon pricing. But the pricing differs significantly among different sectors. Especially energy-intensive sectors pay lower prices to keep them internationally competitive.

Emission trade systems were implemented to evolve a more energy efficient industrial production. But due to the fear of carbon leakage and good lobbying free allocation of emission permits was triggered. Ergo there is no financial reason to become more energy efficient.

Karsten Neuhoff (German Institute for Economic Research, DWI Berlin) showed in his presentation a possible tool to address this problem: a consumption based charge on materials. It means in effect that prices for energy intensive products would go up no matter where they were initially produced. Therefore, international competition would not be changed and a risk of carbon leakage would be avoided. The demand would be changed and a more efficient use of products like steel would be triggered. Also substitutes like wood in constructions would become more important.

Maybe this approach could work. But there is a huge controversy about how to address carbon pricing. In the discussion after the presentation, it was mentioned that carbon leakage is generally overestimated. Nevertheless, a consumption based charge on materials is an interesting idea which could easily be applied.

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