Industry pass-through of ETS-related costs

EU industry – especially manufacturers in the cement, iron and steel, refineries and fertiliser sectors – is passing its ETS-related carbon costs through into product prices, meaning that much of this cost burden is borne by customers, according to research conducted by the Oeko-Institut and CE Delft on behalf of the European Commission. The study reveals whether and to what extent ETS-related carbon costs have indeed been passed through in this manner.

Diverging rates of carbon cost pass-through

The analysis reveals diverging rates of pass-through between sectors. For refineries, cost pass-through ranges from 80% to 100%, depending on the product, while rates in the iron and steel sector range between 55% and 85%. In the cement sector, they range, in general, between 20% and 40%, and seem to be lowest, followed by the iron and steel sector and then refineries, for which the researchers found the highest indicative cost pass-through rates.

Such high cost pass-through rates were also found in the fertiliser and petrochemical sectors, although here the situation is less clear-cut than in the other three sectors. The glass sector lies midway up the table. The study mainly used data for the second and third ETS trading periods (2008-2012; 2013 and 2014) and focused on products from six sectors – iron and steel, refineries, cement, organic basic chemicals, fertiliser, and glass – in various EU member states.

EU emissions trading – the “polluter pays principle

In the European Union’s Emissions Trading System (EU ETS), the power generation and manufacturing industries must obtain an allowance for every one tonne of CO2 emitted. During the first two ETS trading periods, most of these allowances were allocated free of charge. Since the start of the third trading period, the power generation industry has been required to pay for the allowances it needs, whereas manufacturing has, for the most part, continued to receive allowances free of charge in order to avoid any loss of competitiveness. Various studies show that companies have been passing on the notional cost of allowances to customers even when they received them for free – and have thus generated substantial additional revenue. While this is a rational approach if viewed from a commercial perspective, it conflicts with the “polluter pays” principle.

“Companies have been passing through their carbon-related costs to their customers as a price component,” explains Dr Katja Schumacher, an economist at the Oeko-Institut. “The extent to which they are able to do so largely depends on their status within the EU and in international markets and their bargaining power vis-à-vis customers and suppliers.”

Study: Ex-post investigation of cost pass-through in the EU ETS - An analysis for six sectors by the Oeko-Institut and CE Delft

Contact persons at the Oeko-Institut:

Dr Katja Schumacher
Senior Researcher
Energy & Climate
Oeko-Institut e.V., Berlin office
Tel: +49 30 405085-321