Emissions Trading and International Competitiveness: Case Study for Japanese Industries

Environmental regulatory measures, such as emissions trading system, are popular options adopted by many nations and regions, and how they affect corporate activities and behavior as well as the international competitiveness of industries is of a vital interest to stakeholders. The paper analyzes a number of previous studies on this subject and estimates international competitiveness and carbon intensities of Japanese industries through industry and product level assessment, using the methodology adopted for the analysis of EU’s Emissions Trading Scheme (EU ETS). In addition, various options for allocating emission allowances are reviewed in terms of three trade-off factors, such as efficiency, equity and political tolerance. The paper also describes a case study on a hot rolled steel plate manufactured in Japan to determine demand function, price elasticity, substitute elasticity, and domestic and international market shares, using the statistical data on demand-supply trends and price fluctuation. The study also identifies how emissions trading system can affect demand, supply, and trade patterns of a product, and analyzes the range of carbon constraints among nations and regions, which competitor corporations in trading partner nations must face. The result indicates that: 1) In EU and the United States, the introduction of emissions trading system significantly influences industries with higher carbon intensities and severer international competition, such as iron and steel, aluminum, pulp and paper, fertilizers, cement and lime, and inorganic chemicals. However, the combined share of these industries in Gross Domestic Products (GDP) is less than 2% each for EU and the US, and the expected rise in unemployment rate is less than 2%, assuming that, in the case of the US, emission allowances are allocated at the carbon price of 15 US$/t-CO2 and entire cost increases are passed onto product prices as an opportunity cost. 2) The effects on other industries can be considered less than those sustained by labor cost changes or exchange rate fluctuation. * Tohoku University/Institute for Global Environmental Strategies (IGES) ** Tohoku University *** Tohoku University Working Paper 2010-004 2 Institute for Global Environmental Strategies / Working Paper 3) The products manufactured by Japanese industries, including iron and steel, cement, petrochemicals, detergents, and pulp and paper, tend to show higher carbon intensities in general. 4) The case study of hot-rolled steel plates manufactured in Japan indicates that changes occurred in product prices, demand-supply situation, and trade patterns following the introduction of emissions trading system are relatively smaller than the changes seen in the past 10 years, assuming that emission allowances are allocated by auction (at the carbon price of 3000 Yen/t-CO2), and entire cost increases are passed onto product prices. The demand for domestic products will decrease by around 3%, which coincides with the conclusions from similar studies on iron and steel products in EU and the US. 5) Considering energy efficiency improvement and energy price hikes in trading partner countries, especially China, the discussion in the past may have over-estimated the risks of carbon leakage that may occur due to differences in carbon constraint levels. Above findings suggest that the best way to mitigate the risks of Japanese corporations losing international competitiveness might be to adopt a measure similar to those in EU ETS, climate bills in the US, and a bill proposed in Australia that auctions emission allowances, in principle, while offering them free of charge to industries and products that have higher risk of losing international competitiveness, according to the assessment using benchmark method. To be specific, actual measure must select and determine which industries require protection due to their carbon intensities and trade dependencies, and identify actual products and their concrete values to be subjected to benchmark methods in order to ensure efficiency and to reduce administrative costs. The views expressed in this working paper are those of the authors and do not necessarily represent those of IGES. Working papers describe research in progress by the authors and are published to elicit comments and to further debate. Institute for Global Environmental Strategies / Working Paper 3