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

Author

Listed:
  • Piero Basaglia

    (BSE - Bordeaux sciences économiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CESifo - LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München)

  • Elisabeth Isaksen

    (LSE - London School of Economics and Political Science, The Ragnar Frisch Centre for Economic Research, Oslo, Norway)

  • Misato Sato

    (LSE - London School of Economics and Political Science)

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

  • Piero Basaglia & Elisabeth Isaksen & Misato Sato, 2025. "Carbon pricing, compensation, and competitiveness: Lessons from UK manufacturing," Post-Print hal-05652264, HAL.
    • Handle: RePEc:hal:journl:hal-05652264
    DOI: 10.1016/j.jeem.2025.103208
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    Cited by:

    1. Till Köveker & Robin Sogalla, 2026. "Mitigation versus Competitiveness? Industry Compensation in the European Union Emissions Trading System," CRC TR 224 Discussion Paper Series crctr224_2025_756, University of Bonn and University of Mannheim, Germany.

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