Inclusion of consumption as a way to fix the problem of free allocations in emissions trading – An application of material flow cost accounting to climate policy

Summary: A new policy proposal submitted by Karsten Neuhoff and colleagues recommends charging consumers of emissions intensive materials such as steel and aluminium for the carbon emissions of material production. The proposal was developed to be considered for implementation in Phase IV of the EU Emissions Trading System commencing in 2021. Material flow cost accounting was applied to quantify the distribution of the carbon charge across commodity groups and to estimate the resulting price changes.


The European Emissions Trading System (EU-ETS) is the largest operational cap and trade system for greenhouse gas (GHG) emissions. It comprises more than 11000 industrial facilities, whose emissions account for about 40% of the EU’s total. The effectiveness of the system is currently hampered by a low carbon price (around 4 Euros per ton of CO2 in the fall of 2016) and by so-called free allocation.

Free allocation means that emissions certificates are handed out for free to emissions-intensive material producers so as to reduce the risk of these industries to relocate production to regions without a cap and trade system. Free allocation thus effectively impedes innovation, substitution, and material efficiency in the manufacturing industries as the price signal resulting from carbon emissions during material production is largely absent.

Incentives for reducing GHG emissions in material production can be re-activated by including the consumption of carbon-intensive commodities into emissions trading. The novel policy proposal ‘Inclusion of Consumption’ (IoC) stipulates that a charge would be imposed on the consumption of these commodities within one territory irrespective of their origin. The charge would reflect the carbon costs associated with the production of the material with a benchmark technology.

IoC entails a shift of the burden of the carbon charge from the producers to the final consumers of steel-, cement-, and aluminium-containing commodities. IoC is modeled after the excise taxes for tobacco, fuel, and alcohol. IoC is compatible with prevailing WTO regulations and agreements. Revenues collected from IoC could be fed into a trust fund for industrial efficiency improvement and technology development within the region where the charge is levied.

I applied material flow cost accounting to quantify the possible revenues associated with the charge and its distribution across commodity groups. Primary data were the commodity prices for steel, aluminium, plastics, pulp, and cement and the import/export prices for more than 4000 commodity groups reported in the EU ProdCom database. The material composition of the 4000 commodity groups was estimated as well and a sensitivity analysis of the main results was performed.


Figure 1: Liabilities for bulk materials. (From DIW discussion paper 1570, 2016).


At a politically desirable carbon price of 30 Euros per ton of CO2 the carbon-related liability would be as high as 400 Euro per tonne for aluminium and as low as 12 Euro per tonne for pulp. Price changes would be in the range of 2% for paper, 6% for plastics, 11 % of steel, 20 % for aluminum, and about 30% for cement (Figure 1). At the same time, we expect the price changes of final products such as passenger cars to remain below 1%, thus avoiding disruptive changes in consumer spending. With current production and trade levels the total revenue of the charge would be between 15 and 20 billion Euros per year for the entire EU. This amount corresponds to the value of the carbon allowances that are currently allocated for free, albeit at a hypothetical carbon price of 30 Euros per ton of CO2. The analysis also shows that only about 20% of all commodity groups would have to be monitored to achieve 90% coverage.

The analysis is a simple but powerful application of material flow cost accounting at the EU level. It shows how the industrial ecology toolbox can be used to generate quantitative information about material supply chains that are of high policy relevance.


Note: This blog post appeared earlier on and on


Neuhoff, K., Ismer, R., Acworth, W., Ancygier, A., Haußner, M., Fischer, C., Kangas, H.-L., Kim, Y.-G., Munnings, C., Owen, A., Pauliuk, S., Sartor, O., Sato, M., Sterner, T., Stede, J., Tervooren, M., Tusveld, R., Wood, R., Xiliang, Z., Zetterberg, L., Zipperer, V., 2016. Inclusion of Consumption of carbon intensive materials in emissions trading – An option for carbon pricing post-2020. Climate Strategies Report, London, UK.

Ismer, R., Haussner, M., Neuhoff, K., Acworth, W., 2016. Inclusion of Comsumption into Emissions Trading System: Legal Design and Practical Administration, DIW Discussion paper 1579. Berlin, Germany.

Pauliuk, S., Neuhoff, K., Owen, A., Wood, R., 2016. Quantifying Impacts of Consumption Based Charge for Carbon Intensive Materials on Products. DIW discussion paper 1570. Berlin.

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