Copenhagen – The competitiveness issue

Posted on 23 Nov 2009 by The Manufacturer

Steve Radley of the EEF warns against dousing the flames of manufacturing

December’s climate change summit in Copenhagen is now firmly in sight. The theoretical goal is to broker a plan to limit average global temperature increases to 2°C through legally-binding commitments to substantially reduce emissions of greenhouse gases. However, if a credible deal is to be achieved it must not be at the expense of industry competitiveness.

In the race to secure a political deal the needs of manufacturers are often overshadowed. The commitments made by individual countries and the “climate aid” each will provide to support developing countries in dealing with climate change dominate newspaper headlines. Yet it is absolutely vital that manufacturers’ needs and concerns are addressed.

There is no doubt that after Copenhagen politicians will turn to manufacturers to enlist their help to deliver on any promises made at the summit: it is manufacturing that will supply the low carbon products and services that will help to turn political rhetoric concerning the fabled low carbon economy into a reality. But to do so, manufacturers must be set the right conditions to innovate. Key to this is to ensure that manufacturing sectors are subjected to comparable regulation regardless of where in the world they are located.

At the heart of this condition is concern over the spectre of ‘carbon leakage’— the prospect that companies will move to countries without regimes that restrict carbon. In other words, relocating trade flows in order to avoid the additional costs of regulation. This leakage could also occur if market share is lost to companies based in unregulated regimes which, as a result, can undercut competitors.

The worry that jobs will be lost is at the forefront of these concerns. But it is not only jobs that risk being lost; greenhouse gas emissions also risk being lost to unregulated regions, so emissions are offshored rather than reduced, fundamentally undermining political efforts to limit global warming.

EU efforts alone are not sufficient

No country with carbon-constraining legislation — including the UK — is immune. In September, the OECD estimated that if the EU acted alone to cut carbon emissions by 50% in 2050, almost 12% would be offset by emission increases elsewhere. However, if all industrialised countries were to act, this leakage rate would be under 2%.

Of course, as the debates played out in advance of
Copenhagen have indicated, substantial commitments
from all industrialised countries is currently looking
unlikely. India, for example, has threatened to walk
away from the talks if developed countries insist
they reduce their emissions. And with 400 million
Indians still without access to commercial energy, the
pressures that they face are clear.

But at the same time, manufacturing industries in developed and developing countries alike compete
in the same world markets and face the same competitive pressures. For example, a steel works in
China may be of an equivalent standard to one based in Europe, with both selling into the same global, highly-competitive marketplace. But the former may be in a position to sell cheaper product because its carbon-related costs are significantly less, given that the pressure to cut emissions is significantly less and it benefits from cheaper energy costs.

In such cases, comparable regulation is the only solution to safeguard competitiveness. How to entice engagement from energy-intensive sectors in countries like China and India — while placating the fears of industrialists in developed countries — will be central to Copenhagen’s success.

We have already had a glimpse of what might happen if negotiators fail to achieve this holy grail of “comparable regulatory effort”. In the US, industry competitiveness has taken centre stage in debates around the American Clean Energy and Security Act.

A last minute compromise in the Bill going through the House of Representatives saw the inclusion of a clause which allows the President to impose border tariffs on carbon intensive products from countries that fail to take comparable action. The clause remains in the bill currently under discussion in the Senate. A similar proposal has been advocated by the French.

So at present a deal in Copenhagen remains elusive. That is probably not surprising. The agreement over 190 governments and their representatives are seeking to achieve by the 18 December is deeply ambitious. But it is clear that negotiators in Copenhagen must tackle the concerns of manufacturers based in developed countries head on. The border measures, as advocated by the French and Americans, hint of a future of greater levels of protectionism if they fail.

Steve Radley, chief economist, EEF, the manufacturers’ organisation