Basaglia, Piero, Isaksen, Elisabeth 
ORCID: 0000-0002-6557-8001 and Sato, Misato ORCID: 0000-0002-9978-9595
(2024)
Carbon pricing, compensation and competitiveness: lessons from UK manufacturing.
Grantham Research Institute on Climate Change and the Environment Working Paper (406).
Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.
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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.
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