Policies not causing leakage

7th August 2014

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Vanessa Wall

Fears that climate change policies might be harming the competitiveness of UK businesses are not substantiated by the available evidence, a new study has found.

The research, by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment, reveals that the impact of current policies is small or negligible and dwarfed by other factors, such as raw material prices, labour costs and the impact of institutional frameworks.

Economic theory suggests that if UK climate change policies are introduced before other countries act they can increase production costs and prompt relocation, a process known as “carbon leakage”. But, while data from predictive models indicated some carbon leakage could occur, most of the empirical studies showed current UK policies had had little or no impact on business competitiveness. A similar result was found for other EU countries.

The researchers concluded there was “no compelling evidence” that investments in Europe had been cancelled, or production moved, because of the EU emissions trading system (ETS) or, in the UK, because of the climate change levy. They added that this was “not surprising given the relatively low carbon prices” and the existence of compensatory measures, such as the allocation of free permits in the ETS.

But the researchers also warned that carbon prices were likely to rise and, without targeted compensation for certain energy-intensive sectors – such as iron and steel, and refined petroleum products – there could be some relocation.

As a single global carbon price is unlikely soon, the study looked at how best to create a level playing field. But compensatory measures, such as tax breaks, should be carefully targeted, the researchers argued, to avoid undesirable market distortion or costly over-compensation.


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