Carbon pricing, compensation, and competitiveness: lessons from UK manufacturing

Piero Basaglia, Elisabeth Isaksen and Misato Sato

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Carbon pricing is often paired with compensation to carbon-intensive firms to mitigate the risk of carbon leakage. This paper empirically examines the effects of indirect carbon cost compensation on UK manufacturing firms. Using administrative microdata, we combine difference-in-differences and fuzzy regression discontinuity designs to exploit firm-level eligibility criteria and identify the causal impact of compensation. We find that compensation reduces output contraction but also increases electricity consumption and emissions. These findings highlight a key policy trade-off – while compensation can help protect firms’ competitiveness and reduce leakage risks, it may also delay industrial decarbonization and increase the overall cost of achieving national emission targets.

Keywords: carbon pricing; compensation; competitiveness; electricity consumption (search for similar items in EconPapers)
JEL-codes: H23 Q40 Q41 Q52 Q58 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2025-09-30
New Economics Papers: this item is included in nep-eur
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Published in Journal of Environmental Economics and Management, 30, September, 2025, 133. ISSN: 0095-0696

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:128813

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