1. Competitiveness Subgroup Report to WG5/6 16 th July 2007 20 th June – introductory notes circulated to subgroup 22 nd June 2007 –kick-off meeting 28 th June –“key points” meeting notes circulated 29 th June –Preliminary questions sent to Michael Grubbs team 11 th July –Meeting with Climate Strategies Michael Grubb, Damien Demailly

2. Meeting 22 nd June Outcomes –Concern that such important and potentially consequential work had progressed so far without contact with the industries concerned –Noted recommendation in the CS report that further data input from industry would be beneficial –Noted request from (then) DTI for further data/information from industry –Clear willingness from industry members to provide input into the process –Timescale tight –Further information in the “key notes” circulated –Urgency to set up meeting with CS

3. Meeting 11 th July –Very well attended (~28) –Presentations by Michael Grubb and Damien Demailly –Further explanation of the NVAS/MVAS-trade intensity graphs –Detailed review of the work on the cement and steel sectors –Extensive question and answer session

4. Points clarified on 11 th July (1/2) CS is not a consultancy as such but provides a forum for research collaboration Work has however been funded by UK government amongst others and is considered to be highly significant wrt development of UK policy and position with Europe CS brings together bodies where previously there was lack of structural communication Competitiveness work stream is in parallel with CS work on future options for post 2012 & EUETS OEF work ongoing independently

5. Points clarified on 11 th July (2/2) The interim report does not suggest that competitiveness of UK Ltd is challenged by EUETS but identifies key sectors that are impacted Sectors considered potentially at risk are analysed down to SIC 4 digit level Process DOES seek to take account of “leakage” Uses only standard available industry data sets Detailed work presented and associated conclusions based on 50% pass through of costs: not necessarily endorsed in other academic papers e.g. 10-40% or indeed endorsed industry experience. Work only attributes cost pass to direct CO 2 and power supply Process CO 2 is ONLY taken into account in cement and steel NOT in other sectors Opinion expressed that funding was limited, 75% expended, with little time or effort remaining to engage in bilaterals - but potential for minor changes to cement & steel.

6. Subgroup comments on the interim results from 11 th July meeting (1/3) Concern that data used is not representative of current situation. Situation very different for some sectors cf. that in, for instance, 2004 Concern that assumptions including assumptions about how sectors’ infrastructures are currently developing are incorrect/out of date Academic work apparently indicated that last few decades had seen little relocation of UK industry abroad… On the other hand, industry felt that whilst changes might, overall, reflect a limited impact on UK GVA, in fact, basic security of products and stakeholder chains had been severely affected and would continue to be so. High extent of Opt Out in Phase 1 undermines the assumption/ suggestion in the work that most sectors have the ability to signifcantly pass through costs

7. Subgroup comments on the interim results from 11 th July meeting (2/3) Consultants suggests that there has been no evidence of significant UK job losses indicated (work looks mainly at energy intensive sectors with relatively few employees)…. BUT takes no account of downstream job losses as a result of closure/relocation e.g. forming, assembly, filling - except to state that this might be a reason against relocation Work does NOT address; substitution, cross sector and downstream impacts Finished products are said to be those considered but energy intensive industries are often primary or intermediate stages NO account taken of impacts on environmental sustainability other than that of CO 2 within manufacturing itself e.g. ignores impact of loss of national/local primary production on UK waste stream, and ability to reuse and or recycle within the UK etc. (increased export of waste!) Ignores significant CO 2 reduction impacts that recycling has on manufacturing in the UK No knowledge of efficiency/sustainability of competitors

8. Subgroup comments on the interim results from 11 th July meeting (3/3) Requires analysis based on profit as well as GVA – CS indicate significant resources required; 92 subsectors at 4 digit level Requires analysis of how transport affects and is affected by EUETS Concern that time horizon of 2015 is too short Only grandfathering is used for any free allocation whereas alternatives may include alternative methodologies e.g. BM Report indicates possibility of sectoral differentiation; Commission opinion? The work does not capture industry “tipping points” Key impacts of some sectors require further investigation e.g. lime on water treatment (consumption and foul water), agriculture, steel etc. Need to identify which assumptions are incorrect Need to clarify how “coastal” effects are applied in the UK CS lacking information on how heterogeneity of sectors affects the impact of EUETS

9. Key Points for next steps 1.Further liaison is essential a.Data (identify sources and values, supply most up to date) b.Assumptions (review those in model about current and future structure of industries and supply further input as appropriate) c.Identify and potentially incorporate impacts of and impacts on transport 2.For liaison to be effective with CS it is believed it will require active support by government as no existing structure / requirement for cooperation 3.Methodology for cooperation requires setting in place quickly as timescale tight 4.Need to ensure cooperation / consultation on other EUETS work as soon as possible – 2 nd work stream, OEF etc. Particularly to prevent “leakage” 5.What weight will be placed on the CS report wrt UK policy?