GHG-intensive industries and regulation

2008-04-04

in Economics, Politics, The environment

As mentioned in a recent Charlemagne column, certain industries produce so much carbon dioxide that it can be more in their interests to relocate than to face an effective national carbon pricing policy. At least, that is what they commonly argue. Examples of such industries include fertilizer, chemicals, steel, aluminium, and cement. Frequently, they have threatened to relocate if they are required to pay carbon taxes or buy permits for their emissions. While there is some reason to doubt how valid the threats are – it would be very expensive to relocate production facilities and personnel just to escape a new carbon regulatory regime – there is good reason to think about how various forms of regulation would affect such firms.

One mechanism through which such threats might be countered is by reaching agreements among major producers in as many states as possible. A Dutch chemical company will be more willing to accept carbon regulation if it knows that its American and Japanese competitors face similar requirements. This is an approach that worked well in dealing with ozone-depleting CFCs and could work similarly well in GHG-intensive industries that (a) involve a relatively small number of firms (b) located in countries with strong regulatory capacity (c) which have some political willingness to take action on climate change.

One feature many of these industries share is that a high proportion of their emissions are what are called ‘process’ emissions. This means that the greenhouse gasses are released not as a side-effect of energy production, but as a side-effect of the production of whatever it is the industry makes. As discussed before, cement has high process emissions and limited prospects for carbon capture. The situation is similar for at least some of the processes employed in the other listed industries.

One slightly counterintuitive aspect of ‘intensity-based’ cap-and-trade systems (in which firms are obliged to reduce the quantity of emissions they produce per unit of output, rather than in absolute terms) is that they are absolutely brutal for firms with predominantly process related emissions. If a cement company actually cannot do anything to reduce GHG emissions per tonne of cement, the only option under an intensity-based system is to buy 100% of its obligations from firms that have done better than their target or close down. Under a cap-and-trade system with 100% auctioning, or a carbon tax regime, such firms would basically be encouraged to contract while the economy finds less GHG intensive alternatives to what it produces. While that is a very politically difficult thing to call for, it must be remembered that all the years of unregulated emissions were, in effect, an undeserved gift from the general public in this and future generations to those firms. Discontinuing such unearned benefits is a necessary part of curbing climate change.

If we are serious about dealing with climate change, it needs to be acknowledged that not all industries are likely to find technological fixes during an acceptable timeframe. Some will simply need to shut down or be sharply scaled back. Looking across the past 100 years, it is clear that the fates of whole industries have risen and fallen in response to societal forces. The impetus for them to do so now is enormously greater, as nothing less than the future habitability of the planet is potentially at stake.

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{ 1 comment… read it below or add one }

R.K. April 5, 2008 at 7:44 pm

While that is a very politically difficult thing to call for, it must be remembered that all the years of unregulated emissions were, in effect, an undeserved gift from the general public in this and future generations to those firms. Discontinuing such unearned benefits is a necessary part of curbing climate change.

When assigning blame, it is worth bearing in mind that power companies and car companies don’t produce polluting products for their own amusement. They produce them because there is a demand.

Blaming them exclusively for the externality of climate change is akin to only blaming drug dealers for societal problems associated with narcotics.

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