Burden or opportunity? How UK emissions reductions policies affect the competitiveness of businesses

Abstract

The ongoing review of the UK’s Fourth Carbon Budget is closely linked to the debate over the impact that domestic climate change policies can have on the competitiveness of businesses. Notably, there are concerns that, if the UK implements more ambitious climate policies than its trading partners, carbon-intensive producers might relocate. This could mean that some affected sectors may have to reduce their production of goods and services below the optimum level that would be achieved if there were uniform international climate policies. In addition, the impact of climate change policies on emissions reductions could be limited if big emitters simply relocate, especially if they move to jurisdictions that have lower environmental standards. This paper investigates to what extent these concerns are substantiated and whether they justify a change in the UK’s ambitions for reducing its emissions, including the Fourth Carbon Budget. It does so by drawing on a range of ‘ex-ante’ and ‘ex-post’ studies. ‘Ex-ante’ studies aim to predict the outcome of intended policies. They use simulation or generalised economic models with explicitly chosen theoretical foundations (such as costminimising behaviour by profit-maximising producers, or average-cost pricing). Such models are informed by broad empirical evidence about the behaviour of firms. ‘Ex-post’ studies, on the other hand, estimate the impacts of existing policies on business behaviour, using actual evidence and data gathered after their implementation. The paper also provides recommendations about how to ‘create a level playing field’ i.e. how to design policies that can mitigate the undesirable impacts of climate change policies so that UK businesses can compete on more equal terms with their international counterparts. It also highlights the complementary benefits associated with policies that increase a country’s capacity to compete in a global race for low-carbon innovation over the coming century