Dóra Fazekas Carbon Market Implications for new EU - UniCredit ...

The Impact of the EU ETS on the Competitiveness of Participants
In the author’s opinion, the leakage effect is the most important issue to discuss when examining
the effects of the EU ETS on Hungarian sectors. Leakage refers to the phenomenon of moving
production from an area regulated by the EU ETS to an area where these regulations have no affect.
Hungary lies at the periphery of the EU ETS zone; its exposure, thus, to the phenomenon of leakage
is especially significant, as confirmed by the experts interviewed by the author. As it were to turn
out, both the oil refining industry and the cement sector 31 include suggestions in their long-term
strategies for moving their carbon dioxide emitting productions to areas outside the geographic
reach of the EU ETS, where no additional costs are associated with the emission of such pollutants.
The moving of carbon dioxide emitting operations is significant not only because doing so may
reduce Hungarian and European GDP, but also because it threatens the environmental integrity of
the EU ETS. Although the system may meet its targets for reducing emissions, the emission of
harmful substances will only increase on a global level, due to the lower efficiency of Eastern
installations.
The manager in charge of strategy and technology at Dunaferr mentioned that carbon dioxide
emission is an integral component of oil processing, and is thus considered “technological”
emission. There is only one way to reduce this, and that is by reducing production as well, or
eventually shutting down installations (Lukács, 2008). Péter Lukács explained that the possibility of
closing down the company’s Dunaújváros plant was considered during the pilot phase; its
operations could be moved to the Ukraine, where there are no carbon dioxide costs to consider as
the country is not party to the EU ETS. If Dunaferr does double its production capacity by limiting
its production in Hungary to a half of the previous amount – and the other half is covered through
imports from the Ukraine – the emission of carbon dioxide on a global scale will surely increase,
even if the EU ETS does show a drop at the same time. Although production in the Ukraine is less
efficient and is much more CO2-intensive (i.e. more CO2 is emitted to produce the same amount of
steel), it will still be lucrative – thanks to allowance prices – to shift production across the border.
On a global level, this would actually lead to greater pollution of the environment through increased
carbon dioxide emissions. The world would see more carbon-intensive and less efficient emissions,
and efficient production would drop.
This fear – and consideration – was shared by the chairs of the cement industry and the steel and
iron industry interest groups. Although the pilot phases ended neutrally as far as their production
31
In the cement sector, for instance, the area where it is still viable for the company to deliver its product is a
circle with a radius of 200 km; cement produced in the Ukraine thus poses a threat to cement production
in eastern Hungary, while cement produced in Serbia does likewise to cement plants in the southern part
of the country.
134