Assessing Competitiveness Risks
Before designing measures to address competitiveness concerns, you need to assess which sectors actually face significant risks. Not all claims of competitiveness harm are valid. This lesson provides a systematic framework for assessment.
Why Assessment Matters
Assessment serves several purposes:
Targeting
Competitiveness measures are expensive (forgone revenue, administrative costs). They should go to sectors that genuinely need them.
Credibility
A rigorous assessment demonstrates that policy is evidence-based, not captured by special interests.
Proportionality
Different risk levels may warrant different levels of protection.
Evolution
Circumstances change. Regular reassessment ensures measures remain appropriate.
Every industry will claim to be at risk. Assessment separates valid concerns from lobbying. Without rigorous assessment, competitiveness measures become giveaways to well-connected industries rather than targeted support for genuinely exposed sectors.
Assessment Framework
A comprehensive assessment examines multiple dimensions:
1. Carbon cost impact
How significant are carbon costs relative to the sector's economics?
2. Trade exposure
How exposed is the sector to international competition?
3. Ability to pass through costs
Can the sector raise prices to recover carbon costs?
4. Abatement potential
Can the sector reduce emissions to lower its carbon burden?
5. Relocation feasibility
How easy is it to actually move production elsewhere?
Carbon Cost Impact
Measure:
Carbon cost / Gross Value Added (GVA)
OR
Carbon cost / Production costs
Interpretation:
| Ratio | Assessment |
|---|---|
| < 1% | Low impact |
| 1-5% | Moderate impact |
| 5-10% | Significant impact |
| > 10% | Very high impact |
Carbon cost impact examples (at $50/ton CO2):
| Industry | CO2/ton product | Carbon cost | Product value | Carbon cost % |
|---|---|---|---|---|
| Cement | 0.7 ton | $35 | ~$100 | 35% |
| Steel | 1.8 ton | $90 | ~$500 | 18% |
| Aluminum | 15 ton | $750 | ~$2,000 | 38% |
| Paper | 0.3 ton | $15 | ~$800 | 2% |
| Electronics | 0.05 ton | $2.50 | ~$1,000 | 0.3% |
Cement, steel, and aluminum face significant carbon cost impacts. Electronics faces negligible impact.
Trade Exposure
Measure:
Trade intensity = (Exports + Imports) / (Production + Imports)
Interpretation:
| Trade intensity | Assessment |
|---|---|
| < 10% | Low trade exposure |
| 10-30% | Moderate trade exposure |
| > 30% | High trade exposure |
Nuances:
- Geographic trade patterns matter (EU trading with EU is different from EU trading with China)
- Product differentiation affects substitutability
- Some products are highly traded in value but not volume (light, high-value goods)
Cost Pass-Through Ability
Can the sector raise prices to recover carbon costs?
Factors enabling pass-through:
- Differentiated products (consumers will pay more)
- Strong brands or quality reputation
- Low import competition
- Long-term contracts that include cost escalation
- Coordinated pricing in concentrated markets
Factors limiting pass-through:
- Commodity products with global price-takers
- Strong import competition at current prices
- Price-sensitive customers
- Long-term fixed-price contracts
The electricity sector illustrates pass-through dynamics:
Why pass-through is high:
- Electricity cannot be easily imported (except at borders)
- Consumers must buy power from available suppliers
- Competitive power markets set prices based on marginal costs
- Carbon costs raise the marginal cost of generation
Evidence: Studies show 60-100% pass-through of carbon costs to electricity prices in competitive markets. This means:
- Consumers pay higher prices
- Generators recover carbon costs
- Windfall profits occur if generators receive free allowances
Implications: Electricity is often NOT considered leakage-exposed because of high pass-through ability. Free allocation to power generators creates windfall profits without reducing leakage.
This is why most ETS systems now auction electricity sector allowances rather than giving them free.
Abatement Potential
Can the sector reduce emissions to lower its carbon burden?
High abatement potential:
- Multiple fuel options
- Efficiency improvement opportunities
- Electrification possible
- Technology alternatives exist
Low abatement potential:
- Few technology alternatives
- Already highly efficient
- Process emissions (chemistry, not fuel)
- Locked into long-lived infrastructure
Sectors with high abatement potential may face less competitiveness risk because they can reduce emissions rather than bear full carbon costs. Measures should encourage abatement, not just subsidize continued emissions.
Relocation Feasibility
How easy is it to actually move production?
Factors making relocation difficult:
- Large sunk costs in existing facilities
- Skilled workforce not available elsewhere
- Supply chain proximity important
- Market proximity important
- Regulatory barriers to relocation
- Infrastructure requirements
Factors enabling relocation:
- Low capital intensity
- Generic skills
- Commodity products
- Existing global production network
- Clear cost advantages elsewhere
Relocation feasibility comparison:
| Industry | Sunk costs | Labor mobility | Supply chain | Feasibility |
|---|---|---|---|---|
| Aluminum | High | Low (skilled) | Moderate | Low-moderate |
| Textiles | Low | High | Low | High |
| Cement | High | Low | High (local) | Very low |
| Chemicals | High | Low | High | Low |
| Electronics assembly | Moderate | High | High | Moderate |
Cement is very unlikely to relocate (heavy product, local markets). Textile production is highly mobile.
Putting It Together
Combine the assessments into an overall risk rating:
| Factor | Low risk | Moderate risk | High risk |
|---|---|---|---|
| Carbon cost impact | < 1% | 1-5% | > 5% |
| Trade exposure | < 10% | 10-30% | > 30% |
| Pass-through ability | High | Moderate | Low |
| Abatement potential | High | Moderate | Low |
| Relocation feasibility | Low | Moderate | High |
Overall assessment:
- High risk: Multiple factors point to high risk
- Moderate risk: Mixed picture
- Low risk: Most factors suggest low concern
The Assessment Process
Step 1: Gather data
Compile sector-level data on emissions, production, trade, costs, and employment.
Step 2: Apply quantitative screens
Use carbon cost intensity and trade intensity to identify potentially exposed sectors.
Step 3: Qualitative assessment
For sectors flagged by quantitative screens, examine pass-through, abatement, and relocation factors.
Step 4: Stakeholder consultation
Engage with industry to verify data and understand sector-specific circumstances.
Step 5: Classify sectors
Assign sectors to risk categories with corresponding measures.
Avoiding Assessment Pitfalls
Pitfall 1: Taking industry claims at face value
Industries overstate their vulnerability. Verify claims with independent data.
Pitfall 2: Ignoring pass-through
High carbon costs may not hurt competitiveness if they can be passed to consumers.
Pitfall 3: Static analysis
Assessment should consider how sectors will adapt, not just current vulnerability.
Pitfall 4: Political capture
Well-connected industries may get protection regardless of actual risk. Rigorous process matters.
Looking Ahead
Assessment identifies which sectors need protection. The next lesson examines the measures available: free allocation, exemptions, and other approaches to mitigate competitiveness impacts.