UK climate change policy: how does it affect competitiveness?

Headline issue

The Committee on Climate Change has recommended that setting a target to reduce UK emissions of greenhouse gases to an average of 57 per cent below their 1990 levels during the period of the fifth carbon budget (2028-2032) is consistent with a least cost path to meeting the UK’s long-term climate objectives. This policy brief compares the ambition of UK climate change policy with its major international competitors and explores the impact it could have on economic competitiveness.

Key findings

• The UK is part of a leading group of nations that is taking ambitious action on climate change. This group includes many of the UK’s trade competitors, such as France, Germany, Norway, South Korea, Mexico and China. This conclusion is based on a comparison of the stringency of national greenhouse emissions targets, legislation and carbon prices.

• There is robust evidence that current UK climate policy regime has not damaged the competitiveness of UK based businesses nor led to relocation. In particular, there is no compelling evidence that investments in the EU have been cancelled, or production moved, because of the EU Emissions Trading System or, in the UK, because of the Climate Change Levy.

• Evidence shows that climate change policies can increase the competitiveness of the UK in the long term by encouraging greater innovation and efficiency. Well-designed climate change policies could offer business opportunities in fast-growing global markets, as countries, such as the US, China and the Member States of the EU, implement ever more stringent carbon reduction and energy efficiency policies in the wake of the Paris Agreement.

• Climate change policies generate low-carbon innovation which can boost economic growth. Low-carbon technologies have high social and economic value and tend to have broad application across the economy.  Their breath of application is comparable to new technologies in the ICT sector.

• Carbon-related energy costs remain small relative to other production costs. Differences in energy costs between countries do matter in firms’ location decisions, but other costs, such as labour, tend to be more important. Other determining factors are non-cost issues such as access to national/regional markets, access to skills and technologies, raw materials, the investment climate and the fiscal regime.

• Competitiveness concerns are valid for a small number of sectors representing approximately two per cent of the economy (e.g. petro-chemicals, cement, iron and steel).  Policies to support these sectors are already in place and are sufficient to prevent their re-location abroad.  However, these sectors will require further targeted support over the next decade to transition to a low-carbon economy.

• The EU should be prepared to raise the ambition of its emissions reduction target. Its current aim to reduce emissions by 40% (compared to 1990) is at the low end of the target range that would enable the EU to meet its 2050 target at the lowest cost to businesses and consumers.