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


Carbon pricing is often paired with transfers to energy intensive firms to offset higher costs, for example through free emission permit allocation or through rebates for higher electricity prices. While such schemes are intended to limit competitive disadvantage and carbon leakage, they may at the same time attenuate the car- bon price signal. This paper explores the potential trade-off between incentivizing abatement and protecting domestic industry, by studying the impacts of carbon pricing on UK manufacturing. Specifically, we focus on the indirect impacts of car- bon pricing via higher electricity prices, and examine how these effects are mediated through compensation schemes. The UK climate policy landscape offers an ideal setting as electricity prices reflect relative high carbon costs induced by a number of policies, including a UK carbon tax that more than tripled the costs of power sector emissions. By exploiting idiosyncrasies in the eligibility for compensation for the indirect costs induced by these policies, we are able to examine the effects of carbon pricing with and without compensation schemes in place. Using plant level data for the period 2009-2016, and controlling for plant-specific characteristics and industrial trends, we can recover causal estimates of the regulation on a number of outcome variables, including emissions, employment, and economic performance.