'Carbon leakage' - exporting emissions to developing nations

Desert as far as the eye can see, searing-hot sun, chemical factories, refineries and the token golf club: this is what the municipality of Umm Said in Qatar looks like. In the nearby city of Al-Wakrah, officials are planning to build one of the most cutting-edge and innovative soccer stadiums in the world to host the 2022 World Cup.

Questions still remain over whether Qatar used illegal means to secure the rights to host the World Cup, an issue that has been widely reported on in Germany since the end of 2010. But Germany’s unease with Qatar dates back to before FIFA awarded the small Arab state the World Cup honors. In 2010, Qatar Petroleum and Norwegian energy company Norsk Hydro opened a high-tech aluminum smelting plant in Qatar called Qatalum as a joint venture.

Since Qatar is home to vast gas reserves, energy prices there are cheap – a bonus for Qatalum because aluminum plants consume vast amounts of energy. In Germany, electricity accounts for 40 percent of the aluminum production cost. But in Qatar the share is far less.

Norsk Hydro’s German plant in the city of Neuss has long since suffered the consequences of that gap. It was forced to shift its employees to short-time work back in 2009, and that trend has since continued. "A lot of the staff have to sit and wait for two months and then work one month," said Norsk Hydro spokesman Michael Peter Steffen

Exporting emissions to the developing world

"Carbon leakage" is the term used to describe Norsk Hydro’s production practice. It implies that emissions control measures end up "exporting" carbon-intensive industries to the developing world.

Since companies need to acquire emission certificates for their carbon output, their production costs usually rise. This usually affects energy-intensive industries such as aluminum production and sectors such as steel and cement.
Companies dealing in those materials often transfer their production to developing countries and export back to Europe. At times, they buy their preliminary products abroad.

Norsk Hydro, for example, produces large aluminum blocks called ingots in Russia or Dubai and transports them to Germany for further processing. That may to lead to a fall in German carbon emissions. But there’s more to it than meets the eye.

In a recent study, the Ifo Institute for Economic Research in Munich compared the carbon footprints of important industralized and developing countries to their actual CO2 emissions. The first part of the report examined domestic production and the second investigated emissions generated by importing, while exports were left out of the equation.

The results were clear: France’s domestic emissions sank dramatically between 1995 and 2007, and Germany’s emissions shrank faster than its carbon footprint. In recent years however, emissions have risen slightly again. In every major industrialized nation that was included in the study, the carbon footprint was far larger than the emissions being generated at home.

Yet in developing countries like China, that is not the case: not only is the carbon footprint growing larger, but domestic emissions, too, are soaring.

Exaggerated dangers?

Still, whether France and Germany are guilty of carbon leakage remains unclear. The concept of carbon leakage is still a highly controversial one in the scientific community. Firstly, it’s difficult to pinpoint the amount of CO2 generated from importing a product, and it’s harder still to identify the motivation to import products instead of producing them domestically.

Lower wages and an increasingly skilled labor force in countries like China are not indicators of climate leakage.

Some environmentalists accuse energy-intensive industries of intentionally overstating the burden of climate levies in order to boost their profits. In 2010, activist organizations like Oxfam nominated global steel company ArcelorMittal for the “Worst EU Lobbying Award” because it successfully lobbied the European Commission to avoid paying for emissions trading permits.

ArcelorMittal told the EU paying for the permits would spell the end of the entire steel industry in Europe and trigger massive job losses. But environmentalists argue that in reality, the company raked in profits because it could sell its extra permits. Still, the steel giant closed its production plants in the Belgian city of Liège and in eastern France, citing rising steel costs.

The picture is also complicated in the German town of Neuss at Norsk Hydro’s plant. Because large power companies have created monopolies and fossil fuels are ever costlier to consume, energy prices in Germany are soaring. On top of that, the complicated emissions trading system, which now includes operators of fossil fuel power plants, have added a carbon leakage factor to the mix.

Though emissions permits were initially distributed to the energy giants for free, the companies still slapped significant premiums onto the prices handed down to consumers. That problem has in turn affected the Norsk Hydro plant in Neuss, and the operators have been forced to implement short-time work. The German government wanted to pay financial compensation to Norsk Hydro, but Brussels has not yet approved the move.

"We hope we can put an end to short-time work, but that depends on what the EU decides," said Norsk Hydro spokesman Steffen.

Environmentalists call for more energy-efficiency

In order to avoid carbon leakage, the aluminum industry is now exempt from some of its heavier cost burdens, like the renewable energy surcharge that amounts to 3.5 cents per kilowatt hour. In 2013, the industry will take part in the emissions trading scheme for the first time, but the Norsk Hydro plant in Neuss will continue to receive free emissions permits until 2020. That essentially gives Norsk Hydro a free pass to generate an unregulated amount of emissions at no cost for the next 8 years.

Climate activists argue that if energy-intensive industries were held to the same environmental standards as others, they, too would be forced to become more energy efficient.

Norsk Hydro spokesman Steffen disagrees, pointing out that the industry has already dramatically reduced its energy consumption in the last 10 years, and more energy savings measures are in the planning. "The plant in Neuss is one of the most energy efficient in our entire network," he said.

The Ifo Institute study’s author, Gabriel Felbermayr, says there are two alternatives: either to issue a standard environmental tax on the carbon footprint of all products - rendering the emissions trading system obsolete – or, importers must pay and acquire emissions certificates.

The latter is not a popular concept in export-driven economies like Germany. "China could then impose retaliatory sanctions on goods coming from Europe," said Felbermayr. On the other hand, France, which commissioned the Ifo study, is more open to the solution.

Reporter: Martin Reeh /ss
Editor: Sonia Phalnikar