Carbon pricing, compensation, and competitiveness: Lessons from UK manufacturing
Abstract
Carbon pricing is the cornerstone of cost-effective climate policy, but is often paired with compensation to carbon- and energy-intensive firms to mitigate carbon leakage risk. To what extent do such schemes compromise effective carbon price incentives? This paper examines the causal impact of compensation payments for indirect carbon costs embodied in electricity prices using UK plant level data. We hypothesize that the compensation payments incentivized firms to increase production and electricity use, with no effect on electricity intensity. By exploiting firm level inclusion criteria in both a difference-in-differences and regression discontinuity framework, we find that compensated firms maintained a higher production and energy use relative to uncompensated firms, with no detectable effect on energy intensity.
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