The effects of GHG mitigation on manufacturing sectors are likely to be very mixed, depending on the use of carbon-based fuels as inputs, and the ability of the producer to adapt production techniques and to pass on increases in costs to customers. Different manufacturing processes and technologies use carbon-based inputs in very different amounts in relation to output. High carbon-intensive sectors (using the UN System of National Accounts 1993 ISIC, p. 594-5) include basic metals (aluminium, steel), other non-metallic mineral products (cement, bricks, glass) and some chemicals (bulk chemicals). Low carbon-intensive sectors include office machinery (electronics) and other chemicals (pharmaceuticals). Several large sectors (food, textiles, machinery, and vehicles) are somewhere between these extremes.

If the Kyoto Protocol is ratified, manufacturing sectors in Annex I countries can expect to face mitigation policies to meet national targets. The possible options for the firms are basically: (1) energy conservation (adoption of more efficient technologies), (2) shift to products with lower carbon intensities, (3) accept extra taxation or emission permits and the possible effect on profits and/or product sales and (4) shift production abroad as foreign direct investment or joint ventures.

Generally, adopting these options will create ancillary benefits and costs. Speculative ancillary benefits include:

• the adoption of energy conservation technologies that mitigates local air pollution similar to the case of transportation sector;
• the accumulation of scientific and technological knowledge that contributes to the development of new products and processes; and
• the internationalization of manufacturing that stimulates technology transfer to developing regions and greater equity in wealth distribution.

If production is transferred to non-Annex B countries, ancillary costs include

• losses in Annex B manufacturing employment; and
• increases in non-Annex B emissions.

Thus, the assessment of the effects of climate policy on manufacturing could take into account the interactions between sectors and economies. Multisectoral and multi-regional models have been used to evaluate them (see 9.2.6.1 below).

9.2.6.1 Effects on Manufacturing from Multisectoral Top-down Studies

Manufacturing sectors show mixed results in the multisectoral studies (see Table 9.1 above). Reflecting industrial and financial globalization, recent studies tend to involve international trade on both goods and capital. In the main example, McKibbin et al. (1999) evaluate the potential sectoral impacts of the Kyoto Protocol using the G-Cubed model, mainly focusing on the real and the financial trading structure. In case of unilateral action by the USA, the effects on manufacturing industries show at most 1.4% and 1.2% decrease in quantity and price, respectively, although the effects on the energy industry sectors are large, e.g., 56% down in the coal mining industry with a 375.6% price increase in 2020.

9.2.6.2 Mitigation and Manufacturing Employment

Some mitigation policies would increase output and employment in the energy equipment industries. In 2010 under an innovation scenario for GHG mitigation of 10% relative to 1990, GDP for the US is projected to increase by 0.02% (Laitner et al. 1998). Wage and salary earnings are shown to rise in 2010 by 0.3% and employment (jobs) by 0.4%. From another perspective, these net job gains might be all provided by new small manufacturing plants in the USA; in that case, the redirected investments in energy-efficient and low-carbon technologies would produce additional employment equivalent to the jobs supported by about 6200 small manufacturing plants that open in the year 2010. While these impacts are small in relation to the larger economy, it is because the scale of investment is also relatively small. The anticipated extra energy-efficiency and renewable-energy investments in the year 2010 is less than 3% of US total investment in that year.

9.2.6.3 Mitigation Measures and Technology Strategy

Figure 9.4: Contribution to carbon dioxide emission reduction by technology options in Japan in 2010.

Some bottom-up studies assess the relationships between climate policy and technological strategy. For instance, the implementation of a carbon tax or subsidies will strongly affect the investment decisions in manufacturing sectors. Kainuma et al. (1999a) assess how a subsidy affects the adoption of energy conservation technologies to meet Kyoto targets using the AIM/ENDUSE model of Japan. Figure 9.4 shows the contribution of technologies undertaken by firms to reduce carbon emissions in 2010. Subsidies of US$30/tC compare with a carbon tax of US$300/tC to meet Kyoto targets without subsidies (using a rate of 100yen/$) (Kainuma et al., 1997, 1999a).

For developing countries, environmental policy is often linked to technological improvement. Jiang et al. (1998) assess the potential for CO₂ emission reductions in China based on advanced energy-saving technology options under various tax and subsidy measures. For example, they consider the adoption of advanced coking-oven systems by the iron and steel industry in China. Without changes in policy only 15.9% of existing ovens will be replaced by advanced ones by 2010. With a carbon tax, but without a subsidy, the replacement share rises to 62%. With a tax and subsidies for energy-saving technologies, the share rises to 100%, i.e. the advanced ovens will be fully adopted by the industry. They also mention that taxes with subsidies do not give the best solutions for other sectors. They conclude that a carbon tax with subsidy could have reduced CO₂ emissions by 110Mt of carbon-equivalent in 2000 and 360Mt in 2010, from the baseline case of 980Mt in 2000 and 1380Mt in 2010.

Energy-saving technologies across the sectors, such as material and thermal recycling have a large potential to reduce carbon emission. Yoshioka et al. (1993) employed input-output analysis to evaluate the potential contribution of blast-furnace cement to reduce CO₂ emissions: improved technology for the utilization of 1 tonne of blast furnace slag to produce cement could reduce CO₂ by 0.85 tonnes. In the same manner, Ikeda et al. (1995) estimated that the utilization of by-products in the steel and iron industry, and of steel scrap could reduce CO₂ emissions by 2.4% in Japan in 1990.

IPCC Homepage