Research 276: EU ETS and Competitiveness of Irish Industry

Authors: Celine McInerney, Ellen O’Connor, Bernadette Power, Paul Deane and Tom McDermott

Summary: Reforms to the European Union Emissions Trading Scheme (EU ETS) in Phase IV create a potential risk to industrial competitiveness in the power generation and heavy industry sectors through increased costs. The costs may be directly linked to greenhouse gas (GHG) emissions via European Union Allowances (EUAs) or may be indirect via increased energy costs.

Published: 2019

ISBN: 978-1-84095-829-4

Pages: 69

Filesize: 2,086KB

Format: pdf

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Identifying Pressures

Irish electricity generators and energy-intensive industry are obliged to participate in the EU emissions trading system and this may lead to an increase in production costs for these companies. Reform of the European Union Emissions Trading System (EU ETS) has seen significant price increases and may lead to further volatility in prices for emissions allowances. There are concerns that increased costs of compliance will have a negative impact on business competitiveness in Ireland. This project aims to investigate the effects of the EU ETS on competitiveness by (i) reviewing the literature on regulation and firm competitiveness, (ii) analysing firm-level data to determine the impact of the EU ETS and green investment on the competitiveness of Irish industry thus far, (iii) using a survey to find the opinions of stakeholders regarding the EU ETS and emission reduction projects and (iv) estimating the effect on future electricity prices if Ireland were to participate in a carbon price floor.

 

Informing Policy

The research finds that Irish companies have adopted a pay-as-you go approach to emissions reduction, with only a small proportion making long-term capital investments. Our analysis of a broad range of industrial sectors shows that capital investment in cleaner technologies improves the resource efficiency of businesses, which in turn improves their business competitiveness. However, carbon-intensive firms, which are most likely to be ETS-regulated, face competitiveness issues when investing in green capital projects. The stakeholder survey shows that firms face financial and information barriers to reducing the pollution intensity of their operations. A carbon price floor is examined as a method to provide a high and stable price for carbon emissions and accelerate decarbonisation of the economy. The carbon price floor does result in a net reduction in EU emissions, but the burden is largely borne by consumers in the participating countries. The forecast emissions reduction for Ireland is small, although Ireland would face a cost increase of up to 44% in wholesale electricity prices in response to participation.

 

Developing Solutions

Consistent with previous research, we find that lack of finance and uncertainty of payback times are important barriers to pollution control and cleantech investment. Energy costs represent less than 2% of total costs for most firms so a high carbon price alone may not be sufficient to motivate pollution control and cleantech investment. In addition to financial incentives, a more holistic approach needs to be taken to educate companies about emissions reduction. Consumer demand and sustainability as a core part of corporate strategy are factors that motivate companies to invest in emissions reduction. Access to finance is still a significant barrier and lack of internal expertise also inhibits greater uptake of and investment in emissions reduction technologies. Policy interventions around these key areas are required if emissions reduction ambitions are to be realised.