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

Piero Basaglia, Elisabeth Isaksen and Misato Sato
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Piero Basaglia: BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CESifo - LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München
Elisabeth Isaksen: LSE - London School of Economics and Political Science, The Ragnar Frisch Centre for Economic Research, Oslo, Norway
Misato Sato: LSE - London School of Economics and Political Science

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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: Electricity consumption; Competitiveness; Compensation; Carbon pricing (search for similar items in EconPapers)
Date: 2025-09
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Published in Journal of Environmental Economics and Management, 2025, 133, pp.103208. ⟨10.1016/j.jeem.2025.103208⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05652264

DOI: 10.1016/j.jeem.2025.103208

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