and therefore cannot track possible changes in the share of specific industrial demands met by imports. The discussion paper authors presented partial equilibrium analyses which examine price and quantity relationships in specific markets while assuming that all other markets would remain in equilibrium. These assumptions were necessary to limit the scope enough to examine some key relationships. There is no doubt that some possible substitutions of products across industry lines, for example, were not considered. Hopefully, improved knowledge of the key relationships examined here can provide insights into understanding the bigger picture. The report is motivated by negotiations now being conducted within the Framework Convention on Climate Change (FCCC). The ultimate objective of the FCCC is to stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. In April 1995, at the first Conference of the Parties (COP-1) in Berlin, it was agreed that existing commitments in the FCCC were not adequate to address this objective. The parties agreed to negotiate further quantified commitments to limit emissions, but with the proviso that these new commitments would not apply to developing countries. The commitments negotiated under this "Berlin Mandate" are to be concluded by COP-3 in 1997. The extent and timing of emissions reduction by developed countries, the distribution of reduction requirements across countries, and the degree of flexibility to be provided through such mechanisms as emissions trading and joint implementation, emissions budgets, and banking and borrowing are still under negotiation. Decisions made in these areas, as well as domestic decisions involving both the choice of policies and the distribution of burdens across sectors and activities will significantly influence the impact of any new commitments on industry. One possible outcome of international agreement and domestic policy decisions is higher energy prices. This report explores the sensitivity of energy-intensive industries to assumed scenarios of increased fuel prices faced by industrial users in developed countries. To provide a focal point for these sessions, the Office of Policy and International Affairs created two "price adder" scenarios discussed below under Energy Price Scenarios. The discussion paper authors and panelists were asked to focus on three questions: What will be the effects of the specified energy price scenarios on the competitive positions of U.S. producers, including import and export levels, and shares of world production by U.S. plants? What are the likely impacts on key indicators, such as output, employment, energy use, and output prices? and Where in the world and in the U.S. will new plants be most likely to open and where will plants be most likely to be closed? The Main Workshop Findings: As noted above, the observations presented below are derived from the six discussion papers and from the workshops, and reflect the views of the authors and workshop participants. General: In many of these industries, recent U.S. investment has been in the form of refurbishing existing plants rather than building new "greenfield" plants. Even without the assumed fuel price increases, countries with lower costs for energy and other inputs or more rapidly growing demands are more attractive locations for the location of new greenfield plants than the U.S.. Thus, in the base case scenario, which assumes no new policy actions, new greenfield plants are not likely to be built in the study period, to the year 2015. Most of this report focussed on the projected continued economic viability of existing plants in the U.S. (and in other participating countries), in particular on the potential for new investments in these plants. The fuel price scenarios assumed in this study would result in the six industries experiencing significant reductions in output and employment. The assumed fuel price adders would permit less developed countries, not subject to the assumed fuel price adders, to capture an increasing share of the world and U.S. markets. The goods produced in these six energy-intensive industries are traded extensively in competitive world markets. The assumed fuel price adders would have widely different effects within different segments of the six industries and also across different regions. These differential effects include shifts in both industrial composition and geographic concentration, and are due to numerous factors, including variations in energy intensity, production practices, fuel mix, and access to international suppliers. The total effects of fuel price adders on employment, output, and imports do not occur immediately, but are distributed over a period of years. In the short term, the decreases in output could be cushioned by the existing capital stock lowering fixed costs, and some technical improvements partially offsetting the higher variable costs from increased energy prices. In the longer term, the energy portion of new plant location decisions would be driven by the lower prices of fuel in non-OECD countries which is common to both scenarios. To the extent that the assumed fuel price adders encourage a reallocation of new investments away from OECD or Annex I countries and towards the developing countries, the emissions resulting from new plants would simply be redistributed and could even increase if investments made in non-participating countries are less energy-efficient. Price-induced technology improvement in developed countries cannot be relied on to reduce global emissions from energy-intensive industries. Most of these industries are characterized by a production process that has been in use for many years. Technical improvements have been gradual and incremental and have been introduced as part of the normal turnover of the capital stock. These technical improvements have increased overall productivity, i.e., the productivity of labor, capital, and energy. The assumed fuel price increases would not induce these industries to undertake investments or technological improvements that would reduce emissions. The various working groups provided different reasons for this conclusion. Higher energy costs coupled with already thin profit margins would discourage any new investment, and with some international competitors not subject to the assumed price increases, domestic industries would become non-competitive. Industry-Specific: With the assumed fuel price scenarios, about 20-30% of the energy-intensive basic chemical industry would move to developing countries over 15 to 30 years as capital is replaced, with accompanying job losses that could be as high as 200,000 compared to predicted future baseline levels. A significant shift in trade flows from a surplus to a deficit would occur, but the magnitudes could not be assessed with precision. If fuel price "adders" applied to hydro-based and thermal-based electricity, all primary aluminum plants in the U.S. would close by the year 2010. Currently, approximately 40 percent of U.S. primary aluminum production capacity is fueled by hydropower. If hydrobased electricity were excluded from the assumed electricity fuel price adders, only the 60 percent of primary aluminum production capacity that depends on thermal-based electricity would close. Current employment in U.S. primary aluminum production is approximately 18,000. The recycled aluminum market has upward potential to offset a portion of the losses in primary production, with gain of some jobs, but recycling has limitations in terms of supply and quality. Shipments from U.S. steel producers might be cut about 30% under the increased fuel participating countries. The scrap-based producers (mini mills) would be less affected than integrated producers, with the greatest negative impact being felt in the ChicagoPittsburgh corridor where integrated mills are concentrated. Overall, the domestic paper and pulp industry would experience serious negative employment and output effects in response to the assumed increases in energy prices, as imports into the U.S. would displace domestic production. A large cost increase could not be absorbed without a major technological breakthrough in energy efficiency, which is unlikely. Integrated mills currently have the advantage of being able to use self-generated fuels including spent pulping liquors, bark removed from pulpwood, residue wood used as fuel chips, and hydropower to meet a significant proportion of their fuel needs, as much as 56 percent in 1994. If the assumed fuel price increases do not affect wood waste, the nonintegrated mills would be at a significant disadvantage to the integrated mills, and many non-integrated mills would close. Since many non-integrated mills would recycle waste paper into new paper products, mill closures could constrain recycling markets. Recycling also could be deterred by the possibility that the value of waste paper as a fuel could exceed its value as a source of fiber in a scenario of high fossil fuel prices. In the petroleum refining industry, demand reduction alone would be likely to cause a loss of 20% of the industry output. Many U.S. and other OECD refineries would become non-competitive on world markets and would be closed down. The Northeast market is served by local refineries and by Gulf Coast refineries. Refineries in these two regions would be severely impacted by low cost foreign competition and would probably close. The Midwest and Rocky Mountains are relatively isolated and would be less impacted. The West Coast refineries are subject to stringent environmental controls and might also be undercut by lower import prices. For the cement industry, the assumed fuel price increases were estimated to shut down 17 The Energy Price Scenarios: Baseline industrial fuel price projections for the U.S. were taken from the Reference case in the Energy Information Administration's 1996 Annual Energy Outlook (AEO96). Baseline price projections for other OECD' markets were developed taking into consideration current prices and market conditions as well as projected trends in world markets for traded fuels consistent with the AEO96 U.S. projections. This approach allowed consideration of both fuel-specific and region-specific factors. Prices paid by individual industries may vary significantly from these all-industry averages; for example, the Energy Information Administration's 1991 Manufacturing Energy Consumption Survey reports an average electricity price for the aluminum industry that is only 46 percent of the all-industry average. Discussion paper authors and workshop participants were encouraged to use industry-specific fuel price information where available. The hypothetical fuel price scenarios used in this project are within the range suggested by analyses presented at the inter-agency Climate Change Analysis Workshop held at Springfield, Virginia in June, 1996. The analyses that suggested high energy price adders were preliminary in nature and did not incorporate substantial cost-saving features currently part of the U.S. Protocol, such as emissions trading, joint implementation, and multi-year emission budgets. Nor did they assume any complementary technologyoriented policy measures. Further, the industry workshop participants were not asked to consider price scenarios which included ameliorative measures, such as corporate income tax reductions that could help restore industry competitiveness. Further information about the baseline prices and fuel price adders is presented in Organization of the Report: Each chapter of the report focusses on one of the six energy-intensive industries considered in the report. A very brief fact sheet about the industry is included to provide some perspective on the industry in terms of overall manufacturing value of shipments, energy use, and employment. Following the fact sheet are summaries of the discussion paper and workshop meetings, and the full text of the discussion paper. To provide a better contextual framework for the report, the instructions given to the lead authors and the "Berlin Mandate" decision of the FCCC Parties at COP-1 that provides the guidance for ongoing negotiations are also included as Appendices. 1 As of the signing of the FCCC, the OECD countries include: Australia, Austria, |