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

Basaglia, Piero, Isaksen, Elisabeth ORCID: 0000-0002-6557-8001 and Sato, Misato ORCID: 0000-0002-9978-9595 (2025) Carbon pricing, compensation, and competitiveness: lessons from UK manufacturing. Journal of Environmental Economics and Management. ISSN 0095-0696 (In Press)

Text (BIS_JEEM_2025) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (2MB)

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.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Grantham Research Institute
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HB Economic Theory T Technology > TS Manufactures
JEL classification:	Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q40 - General Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Date Deposited:	14 Jul 2025 14:39
Last Modified:	14 Jul 2025 14:51
URI:	http://eprints.lse.ac.uk/id/eprint/128813

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