Paying the full price! Efficient pricing of CO2 abatement along the supply chain for basic materials

Panel: 2. Sustainable production design and supply chain initiatives

Authors:
Johan Rootzen, University of Gothenburg, Sweden
Filip Johnsson, Department of Energy and Environment, Energy Technology, Chalmers University of Technology, Sweden

Abstract

Reducing CO2 emissions from production of basic materials like steel and cement in line with the EU wide climate goals implies a drastic deviation from the historical trend and will require profound changes across the entire supply chains – including measures to reduce the carbon- and energy intensity in primary production while concurrently improving material efficiency in the further processing and use of basic materials. With the price of emission allowances under the EU Emission Trading System currently far below the levels required to induce such a change the aim of this paper is to pave the way for a discussion on complementary policy options.

Tracking the material and value flows involved in the supply chain for steel and cement we assess how the costs of CO2 abatement could be allocated along the respective supply chains. We show that while covering the costs of investing in new low-CO2 steel- and cement-making processes would require substantial increases in the selling prices of steel and cement such price increases would neither significantly alter the cost structure nor dramatically increase the price to be paid by end users, e.g. a car buyer or a procurer of a building or an infrastructure project. This insight, finally, lays the foundation for a wider discussion on possible components of a policy package aimed at incentivizing innovation and modernization along the supply chain for basic materials. In order to be successful such a policy package will likely have to include a variety of components including, e.g; public funding and or risk sharing; procurement requirements that guarantee an outlet for low-carbon materials; and possibly straight taxes that target resource- and carbon-intensive materials. Whereas the high capital cost involved and the risk of carbon leakage may limit the scope for action, important lessons could be learned from experiences with climate policy in other sectors; e.g. the use of green certificates and feed in tariffs.