1. Carbon-Cap workshop: ‘Addressing Consumption-based Emissions: A Chinese Perspective’
Materials efficiency and innovation in building and vehicles-a European Perspective Application of consumption-based improvement options
Karsten Neuhoff
Institute of Policy and Management, Chinese Academy of Sciences,

2. Motivation The role of carbon pricing
Inclusion of consumption in carbon pricing mechanism
Conclusion
Inclusion of Consumption of carbon intensive materials in emission trading systems

3. 1.
Industrial emissions dominated by production of carbon intensive materials
Industrial activities with the highest cost increase from carbon pricing
(Example UK, carbon price 20 €/t CO2 and electricity price increase 10 €/MWh)
Electricity cost increase (blue) cost for buying all allowances (grey) relative to gross value added.
Production of cement and steel alone accounts for 38% of European industry emissions:
Important to realize mitigation opportunities of selected carbon intensive materials
Production and use of these materials justifies focused attention
Inclusion of Consumption of carbon intensive materials in emission trading systems

4. 1.
Three groups of emission reduction opportunities for carbon intensive materials
Group 1: Fuel shifting and production efficiency
Group 2: Carbon focused process innovation
Group 3: Material efficiency and substitution
Estimates for
cement sector
in different
road maps:
Main activity to date, only limited potential remaining No
progress
Largely unexplored
(excemption clinker substitution)
Similar picture for other material sectors like steel.
Mitigation options from all groups required for deep decarbonization (G7) , 80-95% reductions (EU).
But very limited progress with Group 2 and 3.
Inclusion of Consumption of carbon intensive materials in emission trading systems

5. 1
Determinants of pick-up rates of new technologies, materials, practices ..
Internal factors and individual-level context
Socio-cultural context
Institutional, economic and technological context
Determinants of pick-up rate of improvement option by potential implementers (consumers, retailers…)
Preferences, intentions and attitudes
Habits
Knowledge, competence and information
Identity and social status
Socio-demographic characteristics
Policy and institutions
Infrastructure and Technology
Substitutability
Accessibility and Affordability
Policy measure 1
Policy measure 2
Policy measure 3
Policy measures w/ influence on pick-up rate of improvement option ,
Barriers to implementation of improvement options
Sebastian Petrick

6. 1 Policy measures to trigger consumer responses for materials sector:
C-Cap identified policies with high feasibility/acceptance/performance
Informational Instruments
Regulatory and Administrative Instruments
Economic Instruments
Enabling infrastructure and institutional
Mandatory
Approved technologies lists
Mandatory Regulatory standards
Carbon intensive materials charge
Infrastructure improvement
Recycling requirements and waste targets
Business emission agreements / allowances
Voluntary
Information campaigns
supply chain procurement requirements
Rankings and awareness campaigns
Business emission agreements
Inclusion of Consumption of carbon intensive materials in emission trading systems

7. 1 Preferences, intentions and attitudes Habits
Alternative building materials – individual level context
Preferences, intentions and attitudes
Habits
Knowledge, competence and information
Negative perception of and prejudices towards alternative materials (e.g. fire-resistance of timber)
Focus on operational emissions
Lack of awareness, environmental aspects found to play a minor role in most consumer decisions
Slow adaptation by risk-averse communities that are used to conventional methods
Established practices
Time constraints incentivise familiar copy-paste designs
Lack of reliable and comparable information on new materials
Unfamiliarity with alternative materials
Inability to use the technology (e.g. moderate use of wood in Southern Europe)
Barriers to implementation of improvement options
Sebastian Petrick

8. 1 Policy and institutions Infrastructure and Technology
Alternative building materials – institutional, economic and technological context
Policy and institutions
Infrastructure and Technology
Substitutability
Accessibility and Affordability
Existing building codes
Lack of established standards, design guides, tools, standardised details
Small industries cannot compete against established industries’ economics of scale
Supply chain limitations
Functionality of alternative materials (e.g. fire-resistance of timber)
Higher costs of new materials
Increased insurance costs
Uncertainty premium on new options by intermediaries
Local availability of materials and technology
Cost of additional training and research
Shortage of specialist skills
Barriers to implementation of improvement options
Sebastian Petrick

9. Motivation The role of carbon pricing
Inclusion of consumption in carbon pricing mechanism
Conclusion
Inclusion of Consumption of carbon intensive materials in emission trading systems

10. 2.
Carbon pricing can in principle create incentives for all mitigation opportunities
Global
Emissions reductions through
Role that carbon pricing can play:
Full Auction-ing
Role for complementing policies
Group 1
Fuel shifting and production efficiency
Incentives for improving carbon efficiency of materials production 2
Carbon focused process innovation
Consistent mechanism including clarity on costs allocation
(Co-) funding for Research, Development, Demonstration
Adjust norms, standards, training for new practices/materials 3
Material efficiency and substitution
Makes efficient material use / low carbon material competitive
With global converging carbon pricing, all allowances can be auctioned also in materials production.
In such a scheme carbon price creates the full incentive for all Groups of mitigation options.
Inclusion of Consumption of carbon intensive materials in emission trading systems

11. 2.
Free allocation for carbon leakage protection limits incentives from carbon price
Basis of free allowance allocation
Full incentive
Some incentive
Small incentive
Emissions reductions through
Role of carbon pricing
1. Historic emissions
2. Historic production and benchmark
3. Recent production and historic intensity dynamic
4. Recent production and benchmark
Group 1
Fuel shifting and production efficiency
Incentives for improving carbon efficiency of materials production 2
Carbon focused process innovation
Consistent mechanism including clarity on costs allocation 3
Material efficiency and substitution
Makes efficient material use / low carbon material competitive
No matter how allowances are allocated for leakage protection, significant distortions remain:
Historic emissions (or intensities) as basis for free allocation, discourages efficiency improvements.
Can be corrected with use of benchmarks. (2 & 4)
If based on historic output, then allocation can deviate significantly from emissions.
Can be avoided with use of recent production volumes. (3 & 4)
But further limits price pass-through for materials efficiency & substitution. (3 & 4)
If consumers do not pay for carbon, no perspective for large scale use of CCS-type technologies.
Inclusion of Consumption of carbon intensive materials in emission trading systems

12. Recent production and benchmark + IoC2.
Adding inclusion of consumption can restore the carbon price and incentives
Basis of free allowance allocation
Emissions reductions through
Role of carbon pricing
Historic emissions
Historic production and benchmark
Recent production and historic intensity dynamic
Recent production and benchmark
Recent production and benchmark + IoC
Recent production and benchmark
Group 1
Fuel shifting and production efficiency
Incentives for improving carbon efficiency of materials production 2
Carbon focused process innovation
Consistent mechanism including clarity on costs allocation 3
Material efficiency and substitution
Makes efficient material use / low carbon material competitive
Free allocation based on recent production and benchmark eliminates price pass through.
Can be corrected with a consumption charge on carbon intensive materials at benchmark rate.
Thus, full incentives for mitigation opportunities in Group 2 and 3 are restored. +
Inclusion of Consumption of carbon intensive materials in emission trading systems

13. Motivation The role of carbon pricing
Inclusion of consumption in carbon pricing mechanism
Conclusion
Inclusion of Consumption of carbon intensive materials in emission trading systems

14. How IoC strengthens incentives for mitigation3.
The mechanism and its incentives: Domestic case
Process action
How IoC strengthens incentives for mitigation
Creation of liability
per ton of e.g. steel
(benchmark rate times carbon times ton of steel)
Group 2:
Credible perspective for carbon capture: extra costs allocated to consumers, not (cross-) subsidized
Passing on liability
Group 3:
Increases profitability of materials efficiency and substitution with charge on carbon intensive materials
Liability suspended
Release for consumption: Suspended liability becomes due
Companies can inform consumers about level of charge to enhance awareness
Information on embedded carbon engages consumers
Materials production
Manufacturing
Follows model of existing consumption charges (excises) on fuel, tobacco, alcohol etc.
Restores incentive for mitigation opportunities in Group 2 and 3.
Inclusion of Consumption of carbon intensive materials in emission trading systems

15. 3.
No double charging
Consumption
charge added to product price
Cost of
emission
allowances
Free allocation
compensates allowance cost
Product price
Production
cost
Production
cost
Production
cost
With global carbon price, cost of acquiring allowances added to product price.
Free allowance allocation at benchmark per (recent) output reduces cost and product price.
Consumption charge at benchmark restores situation of auctions with global carbon price.
Level playing field maintained, as charge applies to all steel, cement etc. (irrespective of origin).
Consumption charge volume equivalent to revenue if allowances are auctioned to industry.
Consumers face same cost as in world of global carbon price and full auctioning.
Inclusion of Consumption of carbon intensive materials in emission trading systems

16. 3. The mechanism and its incentives: International case
Foreign territory
Process action
Acquittal of liability upon export
Creation of liability upon import based on material weight and benchmark
Domestic territory
Process action
Creation of liability
per ton of e.g. steel
(benchmark rate times carbon times ton of steel)
Passing on liability
Liability suspended
Release for consumption: Suspended liability becomes due
Companies can inform consumers about level of charge to enhance awareness
No differentiation how and where product was produced
No effect on competitiveness of industry: same rules for domestic and foreign products
Inclusion of Consumption of carbon intensive materials in emission trading systems

17. 3.
The effect of combining benchmark based allocation with IoC
Ensures full carbon price incentive for all groups of mitigation options.
No competitive disadvantage for companies because all competitors (also close substitutes) are treated the same.
With free allocation at full benchmark level robust leakage protection also for high carbon prices and therefore long-term clarity for decarbonization.
Inclusion of Consumption of carbon intensive materials in emission trading systems

18. Motivation The role of carbon pricing
Inclusion of consumption in carbon pricing mechanism
Conclusion
Inclusion of Consumption of carbon intensive materials in emission trading systems

19. 4. A few carbon intensive materials dominate industrial emissions
Conclusion
A few carbon intensive materials dominate industrial emissions
Three groups of mitigation options are required
Production efficiency and fuel shifting
Carbon focused process innovation
Material efficiency and substitution
Multiple determinants for efficient material use / substitutes
individual preferences, habits, information
regulation, technology performance, access and affordability
Policy response: Information, regulatory, economic, infrastructure
Example economic instrument: Charge on carbon intensive materials
Can impact corporate / private consumption choices
Complemented with building codes, demonstration projects …
Inclusion of Consumption of carbon intensive materials in emission trading systems

20. Professor Karsten Neuhoff, kneuhoff@diw.de