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

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.

Piero Basaglia, Elisabeth T. Isaksen, Misato Sato, Carbon pricing, compensation, and competitiveness: Lessons from UK manufacturing, Journal of Environmental Economics and Management, Volume 133, 2025, 103208, ISSN 0095-0696, https://doi.org/10.1016/j.jeem.2025.103208.