Seminar on Carbon Leakage
The British Embassy, Tokyo
October 7, 2010

Impacts of Carbon Leakage
by Climate Policies in Japan
Keigo AkimotoGroup Leader, Systems Analysis Group
Research Institute of Innovative Technology for the Earth (RITE)
Guest Professor, Graduate School of Art and Science
The University of Tokyo

Marginal abatement cost ($/tCO2)

Comparison of Mid-term Targets
in Marginal Abatement Cost (Carbon Price)

Developingcountries(e.g., Brazil,Indonesia)

Source: RITE, 2009

There are large differences in marginal abatement cost (carbon price) among
countries. Potential carbon leakages are caused from the differences.

2

Share in Emission Reduction Potentials by Cost
for Annex I Countries in 2020

Shares of emission reduction potentials below
500$/tCO2

The figure shows shares of GHG emission reduction potentials by cost
below 500$/tCO2 in each country.
100%
90%
80%
70%
60%

$200 - $500/tCO2

50%$100 - $200/tCO2

40%$50 - $100/tCO230%$0 - $50/tCO2

20%
10%
0%

The share of reduction potentials below 50 $/tCO2 is relatively low in Japan
compared with other countries.

3

Share of Emission Reduction Potentials by Cost
in Industrial Sector for Annex I Countries in 2020

4[％] (Share of emission reduction potential by cost in baseline emissions (BaU case) in inddustrial sectors of each country.)

Japan
2.0%
(Representative measures)

0-50 $/tCO2

Increase in waste biomass use invarious industrial sectors
2.0%(Representative measures)

50-100 $/tCO2

100-200$/tCO2

Energy saving in iron&steel, cementand petrochemical sectors
5.5%(Representative measures)
Energy saving in various
industrial sectors
7.6%(Representative measures)

200-500$/tCO2

Total

Energy saving in iron&steel,chemical sectors etc. byreplacement of facilities with longremaining lifetime
17.0%

EU27US

9.0%(Representative measures)
Energy saving in iron&steel
and alminium sectors

17.4%(Representative measures)
Energy saving in iron&steel,chemical, and alminium sectors

Increase in waste biomass use

Increase in waste biomass use

7.1%(Representative measures)

10.8%(Representative measures)

Energy saving in petrochemical
and chemical sectors
5.8%(Representative measures)
Energy saving in cement andother industrial sectors

Energy saving in cement andpetrochemical sectors
8.1%(Representative measures)
Energy saving in various
industrial sectors

5.2%(Representative measures)

1.0%(Representative measures)

Energy saving in iron&steel, cement,
petrochemical sectors etc. byreplacement of facilities with longremaining lifetime

Energy saving in iron&steel, cement,
petrochemical sectors etc. byreplacement of facilities with longremaining lifetime

27.0%

37.3%

Note: The shares of emission reduction potentials represent those not from the emissions in a certain base year
(e.g., year of 1990) but from baseline emissions (BaU case) in 2020 .

The share of reduction potentials in industrial sectors below 50 $/tCO2 is relatively low
in Japan compared with other countries.

Estimates of Cost Increase
in Energy-intensive Sectors

5

Estimated by RITE
(Japan)Climate Strategies, 2007
(EU)

CarbonTrust, 2008
(UK)

Emission
reduction target
in carbon price

50 $/tCO2

476 $/tCO2

15 €/tCO2

45 €/tCO2

20 €/tCO2(corresponding
to -4% relative
to 2005)(-25% relativeto 1990)

Iron & steel

+18%

+173%

+3%+9%+4.28%

Cement+42%

+397%

+22%

+65%

+14.54%

Notes:
No free allocations are assumed in all the studies.
Estimations of cost increase under free allocations are complex because allocation methods, e.g., grandfathering,
benchmarks, affect the costs, and it is not easily nor uniquely done to compare the cost estimates among research studies,and therefore, only no free allocation cases are shown.
Reference price of crude steel, clinker and electricity is assumed to be 55,000 JPY/ton of crude steel, 10,000 JPY/ton ofclinker and 20 JPY/kWh, respectively, for the estimates by RITE.
Sources:
Climate Strategies, 2007; Differentiation and dynamics of EU ETS competitiveness impacts
Carbon Trust, 2008; EU ETS Impacts on Profitability and TradeFree allocations will be expected necessary for energy-intensive sectors evenunder low carbon prices, e.g., below 50 $/tCO2.

Implications on Carbon Leakage
from Broad Existing Analyses

6Broad existing analyses indicate:♦ There are significant impacts on energy-intensive and tradeexposed sectors including cement, iron & steel and aluminum
sectors, if no free allocations are introduced.
♦ However, the impacts on other sectors are not large, andlarge impacts on such energy-intensive sectors can be also
avoided if appropriate free allocations are introduced.
Such basic insights can be commonly drawn from theliteratures. However, all the analyses have been conductedassuming low carbon prices (e.g., 20 €/tCO2).
Another challenge is how to allocate free allowances
appropriately without disrupting the economy. Top-down
allocations by governments will not be able to achieve them.

Literature Review on Impacts of Carbon Leakage
Source7

Assumed carbon price foranalyzing impacts of carbon
leakage

European Commission, McKinsey, Ecofys, 2006; EU ETS
Review – Report on International Competitiveness20 €/tCO2 (Elec. price: +10 €/MWh)

Climate Strategies, 2007; Differentiation and dynamics of EU
ETS competitiveness impacts

15 €/tCO2 (Elec. price: +10€/MWh); sensitivity analysis: 30 and45 €/tCO2Grubb, M. et al., 2009; Climate Policy and Industrial
Competitiveness: Ten Insights from Europe on the EU
Emissions Trading System

20 $/tCO2 for US
20 €/tCO2 (Elec. price: +10 €/MWh)for EU

Carbon trust, 2009; Tackling carbon leakage – Sector-specificsolutions for a world of unequal carbon pricesEU ETS price in 2016: 14.5 €/tCO2
Analysis price: 30 €/tCO2

Aldy, J. and Pizer, W., 2009; The Competitiveness Impacts ofClimate Change Mitigation Policies

15 $/tCO2

European Commission, 2009; Commission Decision
determining a list of sectors and subsectors which are deemed
to be exposed to a significant risk of carbon leakage …

30 €/tCO2

Monjon S. and Quirion, P., 2009; Addressing leakage in the EU
ETS: Results from the CASEII model

14-27 €/tCO2

All the analyses assume low carbon prices (below about 50 $/tCO2, mainly of20 $/tCO2 or 20 €/tCO2).

Key Messages

8♦ A large gap of the carbon price exists between international

analyses/discussions, assuming only 15-30 $/tCO2 or €/tCO2,and the Japanese situations, where the estimated carbon
price is 476 and 285 $/tCO2, if 25% and 15% reductions,
respectively, relative to 1990 is achieved domestically.
Neglecting this gap of carbon price will mislead discussions
on the carbon leakage.
♦ ETS will work only under carbon prices below about 50$/tCO2 in a real world, considering impacts of carbon leakage
which takes place in case of large differences in marginal
abatement cost among countries.
♦ However, the emission reduction potentials below 50 $/tCO2
is small particularly in industrial and power sectors of Japan.
♦ Best policy mix and policy designs are required considering
different situations among countries.

Appendix

Marginal Abatement Cost Curves in 2020

10

Japan -25%：476$/tCO2

500
Alternative 6

The target by prime minister Hatoyama(in the case all the reduction areconducted domestically)

Marginal abatement cost [$/tCO2eq]450400350300Japan -15%：285$/tCO2

Around tentimes higher
than the EUand UStargets

Alternative 5United States

US -17% relative to 2005(-3% relative to 1990)

250

EU-27Japan200
Japan +4%

Japan -7%Annex I

150
Alternative 3100Annex I-25%
Alternative 250 Alternative 10-30-20-10010203040

GHG emission reduction in 2020 relative to the 1990 level [%]GHG emissions in 2005

50
EU-30% including 4% of CDM

EU-20% including 4% of CDM

15Target relative to 1990

10High end

5Low end

GHG emissions relative to 2005 (%)

GHG emissions relative to 1990 (%)

Mid-term Emission Reduction Target of Major
Annex I Countries (Y2020)

0-5-10-15-20-25-30-35

Marginal abatement cost

1.2

Target relative to 2005
High end
Low end

Per-GDP Cost

High end
400

Low end

300
200
100

00

Estimates with the RITE DNE21+ modelHigh end

1Per-GDP cost (%)

Marginal abatement cost （$/tCO2eq.）

500

35
30
2520
15
1050-5-10-15-20-25-30-35

Low end
0.8
0.6
0.4
0.2
0011

Mid-term Emission Reduction Target of Major
Non-Annex I Countries (Y2020)
Target relative to 1990

350
300

160
GHG emissions relative to 2005 (%)

GHG emissions relative to 1990 (%)

400

Low endHigh end

250
200
150
10050Korea

China

India

Low end120

High end

10080
604020-20

Marginal abatement cost

0.18

Low end0.16

High end

0.14

20

Per-GDP cost (%)

Marginal abatement cost ($/tCO2eq.)

140

0025

Target relative to 2005

1510Korea

China

India

Per-GDP Cost
Low endHigh end

0.12
0.1
0.08
0.06
0.04

50000

Korea
China
Estimates with the RITE DNE21+ model

0.02

India

Korea

00

China

India

12Comparison of MAC in Japan for 2020
among Different Models

Marginal abatement cost (JPY/tCO2)

10000080000
RITE DNE21+
AIM/Enduse[Global]

60000

KEO
AIM/CGE[Japan]

40000

JCER-CGE
JCER-Macro

20000

05%

0%-5%-10%-15%-20%-25%

Emissions relative to 1990
Source: Analyzed by Advisory Committee for Mid-term Target, 2009
Note: The prices of two global models of RITE DNE21+ and AIM/Enduse[Global] are converted by using 1$=120JPY.

13

Comparison of MAC in the World for 2020
among Different Models
RITE DNE21+

Top-down models

Source: M. Amann et al.; GHG mitigation potentials in Annex I countries-Comparison of model estimates for 2020, (2009),IIASA Interim Report IR-09-034

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