Business Trends: The Impact of a Carbon Tax on the European Chemical Industry

Saxton, D., FaÍsca, N., (Nexant Energy and Chemicals Advisory/Hydrocarbon Processing) Over the past several years, greenhouses gas (GHG) emissions have become a pressing global issue. Europe is leading global efforts to become climate-neutral by 2050 but may do so at the expense of its chemical industry.

Private and public stakeholders are in pursuit of how carbon-related price signals can drive global emissions reduction. A wide range of approaches and paths allows governments, businesses and institutions to select the method best suited to the broader policy environment, although the most common policies are emissions trading schemes and carbon taxation. It is a divisive subject within the European industry, given that poorly implemented legislation harms the competitiveness of local manufacturing assets. The challenges for CO₂ pricing include:

The European chemical industry could benefit from a carbon tax on traded goods—the most transparent mechanism is to implement a tax per ton of traded chemical. Carbon emissions can be estimated per ton of product and the price on emissions set by the cost of capturing 1 metric t of carbon dioxide (CO₂).

Imported goods would be taxed at the EU border based on the estimated volume of emissions per ton of goods sold at the port of origin (e.g., fuel mix and best available technology). Individual European producers are not responsible for reducing emissions upstream of their feedstock if it is produced in Europe, as the value chain would be taxed twice. They are also not responsible for emissions downstream of their product. However, importers should be accountable for their upstream procurement value chain and taxed on a well-to-product basis to ensure both European and non-European producers are treated on the same basis.

Given there is an agreed price, the cap may be used to combat carbon leakage by including importers. If importers are allowed access to the EU ETS and operate under this cap-and-trade system as part of an EU carbon border tax, there may be several issues in its implementation. The main problem is that it may raise non-discrimination rules under the World Trade Organization’s General Agreement on Tariffs and Trade (GATT).

From a price viewpoint, the cost of capturing 1 metric t of CO₂ is $130 in Western Europe. If a dedicated capture company sells carbon credits, they would receive $25/t from an emitter (February 2020 price) and would be bankrupt by the end of the month. The system only allows for tree planters!

The authors propose that CO₂ has a floor price at the cost of capturing it at sufficiently high purity as:

The cost of carbon capture includes variable costs, fixed costs, depreciation on the newly built capture plant and an adjustment to account for the CO₂ released by the utilities used to capture the CO₂ (FIG. 3). The EU ETS would not accept this price floor, as the system is not on a cost basis.

The authors believe that a carbon tax is necessary to incentivize the reduction of GHG emissions in Europe and indirectly in exporting markets. If implemented correctly, it could benefit the cost competitiveness of the European chemical industry.

The most transparent mechanism is to tax products based on the ratio of tons of CO₂/t of delivered goods. The pricing mechanism for CO₂ should consider the price of capture using best available technologies. It has the merits of incentivizing the reduction of emissions (i.e., volumes) and also the development of better CO₂ capture technologies.

Consumers have the final say. The commitment to the Paris agreement to address the roots of global warming, such as GHG reduction, needs an initial financial incentive to disrupt the status quo of the manufacturing industry and consumption patterns. READ MORE