Allocation and Related Issues for Post-2012 Phases of the EU ETS Page: 16
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Competitiveness Effects
compared to total costs, so that emissions costs may constitute a large proportion of profits
even where they are small compared to other costs.
3.3.1.2.2. Cost increase as a proportion of profits /profit margins
A comparison of the added production (marginal) costs arising from the Scheme and the
profit margin on each unit sold could provide a more informative measure of the importance
of cost increases for a sector. This information is unlikely to be available for individual
firms -particularly for multinational companies with activities in different sectors-and
where it is available its use may raise concerns about commercial confidentiality. However, a
related measure on the sector level is "gross value added" (GVA), which is calculated as part
of GDP in national accounts. GVA is roughly equal to the value of sales revenues less the
costs of "intermediate consumption", i.e., the value of goods and services consumed as input
to production. If the costs incurred as a result of the trading scheme are small relative to
overall GVA, this may be a first indication that competitiveness impacts are unlikely to be
large.
This is subject to important caveats, however. While GVA has similarities to conventional
accounting measures of "profit", there also are important differences. Notably, GVA
includes wages paid by companies. As these payments do not accrue to firms, they are not
included in conventional measures of profits. A sector therefore may in principle have large
GVA not because constituent companies have large profit margins, but because it is relatively
labour intensive. One option therefore may be to compare costs not to GVA, but to GVA less
labour costs. Such an adjustment is likely to be feasible using data collected by national
statistical agencies.
Several other considerations would arise in the use of GVA data. GVA statistics exist on a
number of different levels, and may exist on the level of individual enterprises in some
circumstances. It therefore would be necessary to determine the resolution at which costs are
calculated. Especially in industries with multiple products or production routes, emissions
costs / GVA may differ significantly in sub-industries. It also would be necessary to account
for the data time period and any changes to GVA. Especially in industries sensitive to
economic cycles and / or with long investment cycles, GVA may vary over the economic
cycle, and measures of the significance of emissions costs therefore also could vary.
As noted above, even if a pertinent measure of relative cost can be derived, on its own it
would not be informative about competitiveness impacts. A possible use of indicators of
relative cost could be to identify the "worst case scenario" impact if prices were not to
increase at all and no free allowances were awarded, and thus to identify sectors for which
competitiveness impacts are not likely to be significant. Even in this case, however,
interpreting the results may not be straightforward-for example, if a sector or firm required
substantial capital expenditure on existing or new plants, to be financed out of operating
profits (essentially GVA less labour costs), it is not clear whether or not the denominator
should include the required capital expenditure.
3.3.2. Exposure to internationalloutside competition
As noted above, the extent to which prices increase and demand is reduced in response to
higher costs can depend on a number of factors, including price regulation, the nature ofNERA Economic Consulting
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Harrison, David, Jr.; Radov, Daniel & Klevnas, Per. Allocation and Related Issues for Post-2012 Phases of the EU ETS, text, October 22, 2007; [Brussels, Belgium]. (https://digital.library.unt.edu/ark:/67531/metadc29374/m1/22/: accessed April 25, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; .