Committee on Climate Change

In principle policies to reduce carbon emissions could lead to competitiveness impacts for the UK (e.g. firms exposed to carbon pricing could relocate production overseas to a country without carbon constraints).

In our December 2008 report we argued that the maximum long-term impact of this effect was likely to be small, given:
 

• Many sectors of the economy are inherently untraded (e.g. retail), 
• Energy costs are only a small part of total production costs in many sectors (e.g. financial services), 
• Carbon pricing is imposed across the EU, so competition from inside the EU is relatively unaffected, 
• Even if production does relocate, new economic activities will emerge in its place over time.

However, any such effects should ideally be avoided given the possibility for larger regional and short-term impacts and the potentially adverse effect on global emissions.

In our December 2008 report we drew on analysis by the Carbon Trust , which demonstrated that potential impacts would be limited to a subset of industries within the EU ETS, with further analysis required to identify exactly which ones.

There are several possible policy responses to mitigate possible competitiveness issues for these industries:
 

• Global sectoral agreements 
• Border tariffs 
• Free allocation of EUAs

In our December 2010 report we noted that to the extent that a global deal for the 2020s may result in carbon constraints for some but not all countries there could also be potential competitiveness impacts  in the 2020s. The same options will be available to deal with these, and should be deployed as appropriate.

For the 2020s if a global deal were to result in carbon constraints for some but not all countries, there would be the risk of leakage, particularly as regards energy-intensive industries.

These could be addressed through sectoral agreements or through the imposition of border carbon price levies, with the specific policy instrument to be determined as any competitiveness risks
are better understood.

In our 2011 reports on Renewable Energy and Progress towards meeting carbon budgets we noted the importance of addressing any competitiveness impacts resulting from increased electricity prices due to either support for renewables or the UK carbon price floor. We also noted the potential for the UK to gain competitive advantage through developing a full range of options for decarbonisation in the 2020s, then deploying them according to least-cost principles at that time.