Assessing the trade and innovation impacts of climate change policies: do they help UK firms or competitors abroad?

Abstract

Is there evidence that climate change regulations in the UK cause manufacturing companies to outsource the production of pollution intensive input materials? If so, does outsourcing to low production cost countries lead to higher innovation in these countries (innovation leakage)? One of the main objectives of climate policy instruments is to give businesses the incentive to reduce carbon emissions, by investing in the development of improved processes or products which results in less carbon intensive production. However, there is also the possibility that instead of cleaning up their own production, the policy triggers companies to offshore the pollution by outsourcing the production of carbon intensive raw materials (such as clinker) to third countries, to avoid the regulatory costs involved in producing the raw material domestically. By exploring the interaction between outsourcing and innovation empirically, this study will provide new insights to the current debate on the optimal portfolio of climate policies to align incentives with sectors’ mitigation potentials, including direct Research and Development funding or deployment policies to support innovation and carbon leakage prevention policies. This research also builds on and contributes to the general empirical literature on trade and technical change and the determinants of environmental innovation.

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