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 carbon leakage risk. This paper examines the causal impacts of compensation payments for indirect carbon costs embodied in electricity prices. We use confidential UK administrative microdata to exploit firm-level inclusion criteria in both difference-in-differences and regression discontinuity frameworks. Our findings suggest that compensated firms increased production and electricity use relative to uncompensated firms, with no significant effect on energy intensity. While compensation lowers leakage risk, it also implies large forgone opportunity costs of public funds and increased mitigation costs of meeting national emission targets.

Keywords: carbon pricing; compensation schemes; competitiveness; electricity consumption (search for similar items in EconPapers)
JEL-codes: H23 Q40 Q41 Q52 Q58 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2024-02-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122364

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