The EU's Carbon Trading Scheme Killing Jobs to Save the Climate

The price of European emission permits is rising so rapidly that German companies are threatening to leave the country. Thousands of jobs could be lost. And the environment may, in the end, be no better off.
Von Karsten Stumm

They sat silently through two lectures, but then they couldn't control their anger any longer. The civil servants from the Environment Ministry, the Environment Agency and the German Emissions Trading Authority made it sound easy for industry to take up carbon trading. It was just too much for the managers to tolerate.

"If that's the shape the trading will take, we will simply move our cement operation to Ukraine," a cement factory manager shouted into the lecture hall. "Then there won't be any trading here, nothing will be produced here anymore -- the lights will simply go out here."

The businessmen's anger surprised the emissions-allowance trading experts. They had invited industry representatives to a relaxed forum at the Environment Ministry's office in Bonn. They wanted to present international developments in the carbon trading market. However, the mood in the German business world has soured -- managers no longer have the stomach for academic lectures. The reason is that emissions allowances are already burdening some companies that require a lot of energy for production purposes.

In the last 12 months alone, the price for the right to pump a ton of carbon into the atmosphere has shot up from €23 ($36.5) to nearly €30 ($47.6), according to the European Energy Exchange in Leipzig. This hike of around 30 percent has a direct effect on the electricity production of power companies.

According to calculations by Point Carbon -- a Norwegian company that specializes in analyzing global power, gas and carbon markets -- this price hike would drive up the marginal cost of energy from an old brown coal power plant by the entire price of carbon. For modern natural gas power plants, it would increase prices by a third. Energy company RWE, which is based in the German city of Essen, reckons it alone will have to pay €9 billion ($14.2 billion) for its own electricity production, which it, of course, will pass on in higher electricity prices. So carbon trading will have a direct impact on which countries firms chose to locate in.

"If the cement industry is gradually pulled into the trading of carbon emission allowances, companies will move production to countries that don't take part in the scheme," Andreas Kern, President of the German Cement Industry Federation, has warned.

Thousands of Jobs in Danger

Still, the really tough measures of the European emissions trading scheme have not yet been put into force. Only from 2013 -- the start of the third trading period -- will prices shoot up.

According to European Commission plans, every European company will then have to acquire pollution permits from a sort of stock exchange. So far the permits have been handed out free, or largely free. In the coming months the European Council and European Parliament are supposed to give their blessing for the Commission's plans. And then the pressure to relocate abroad will likely rise for affected German firms.

"The cement industry is also facing cost increases of around €900 million ($1.4 billion) from 2013," Kern said. "That amounts to around half of our current annual revenues." Not surprisingly, the German finance ministry is now looking into whether some sectors should continue to receive the emission permits for free, Manager Magazin Online has learned.

According to calculations by the Federal Statistical Office and the Institute for Applied Ecology, a number of other German companies from industrial sectors other than the cement industry will relocate at least part of their businesses because of the new carbon trading scheme -- either because of the rising cost of permits, or because of higher electricity prices.

"In Germany the raw-material chemical industry, companies from the iron and steel sector, lime producers, aluminium producers and refineries might be affected," Franzjosef Schafhausen, the Environment Ministry's undersecretary, said at the Bonn conference. Felix Matthes, coordinator for energy and climate protection at the Institute for Applied Ecology, added: "The CO2 price signal prompts shifts in production and investment. Yet it doesn't lead to lower overall emissions, as the production and investment at the company's new sites will not be subject to CO2 pricing, either now or in the near future."

Thousands of German jobs won't be placed in jeopardy, of course, if enough other countries join the European carbon trading scheme. But at the moment there is only one winner: the German state. Finance Minister Peer Steinbrück can expect tax revenues from the climate protection program which will far exceed estimates from the start of the year.

Until the end of June, according to the finance ministry, the program added €525 million ($832 million) to the state's coffers; in the second half of the year it could rise to €900 million ($1.4 billion) -- more than predicted. However, this sum would not even cover a fraction of the fall in tax revenues from thousands of job losses which may result from the carbon trading scheme.

This article originally appeared on Manager Magazin Online.

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