CO2 compensation scheme likely to mitigate carbon leakage

26. February 2020 | News

The Norwegian CO2 compensation scheme compensates power-intensive industry for the indirect carbon costs they face via electricity prices. Our study finds that the scheme is likely to have mitigated carbon leakage from Norwegian industry.

Commissioned by the Norwegian Ministry of Climate and Environment, THEMA (supported by EWI in Cologne) has assessed the impact of the CO2 compensation scheme on carbon leakage from Norwegian industry.

The current scheme is valid through 2020. The EU compensation framework for 2021–2030 is under development and the Norwegian authorities will eventually have to decide on whether Norway will continue to offer CO2 compensation. The Ministry commissioned the study to find out to what extent the scheme has mitigated carbon leakage to date in accordance with the objectives of the scheme.

Carbon leakage occurs when emissions move from one area to another due to differences in the costs associated with CO2 emission abatement.

The CO2 compensation scheme is regulated through EU state aid guidelines. It is up to EU member states to voluntary implement the scheme. Norway, as well as a number of EU Member States, have opted to provide compensation schemes.

The objective of the scheme is to mitigate carbon leakage from power-intensive industries due to the impact of carbon prices on power prices.

The scheme compensates selected industries for the increase in their electricity costs due to the EU ETS. In order to qualify for compensation, the industries must fulfil two requirements:

  • They operate within sectors that are deemed highly exposed to competition from industry outside the EEA.
  • Their production is necessarily highly power intensive.

It is challenging to quantify the impact of CO2 compensation both on decision makers and via statistical data. Decisions that may yield carbon leakage, such as changes in production, closures, non-realised investments and adjustments in production capacity, are affected by a large number of factors. In addition, the scheme has only been implemented since 2012, and the many of the relevant decisions are long-term.

As the basis for our analysis, we have therefore used interviews with decision makers in Norwegian industries that have received carbon compensation in order to uncover the role of CO2 compensation in the making of relevant decisions. Through the interviews, we investigated how the scheme has affected three types of decisions that may yield carbon leakage: investment decisions, production decisions, and customer decisions.

We find that it is likely that the CO2 compensation scheme has mitigated carbon leakage, primarily by impacting investment decisions. In addition to the value of the money transfer, the scheme functions as an insurance against higher CO2 prices in the future and sends a positive signal about Norwegian authorities’ attitude towards industrial activity in the longer term.

The scheme has a weaker impact on production decisions. This is not surprising as the compensation is based on historic reference production, and is only affected by large changes in production
Customer decisions could potentially help reduce the risk of carbon leakage if customers are willing to pay for products from areas where carbon costs are internalised. There is, however, little evidence that there is such a willingness in the markets in which Norwegian power-intensive industry competes.

Read the report (in Norwegian): 

THEMA Rapport 2019-20 >> Betydningen av karbonpriskompensasjon for norsk industri

portrettbilde, forfatter

Arndt von Schemde
Partner and CEO, PhD
+47 982 63 986