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

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  • Basaglia, Piero
  • Isaksen, Elisabeth
  • Sato, Misato

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.

Suggested Citation

  • Basaglia, Piero & Isaksen, Elisabeth & Sato, Misato, 2025. "Carbon pricing, compensation, and competitiveness: lessons from UK manufacturing," LSE Research Online Documents on Economics 128813, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:128813
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    Keywords

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    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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