Tackling carbon leakage: sector-specific solutions for an world of unequal carbon prices

This report looks at the nature and scale of the carbon leakage problem, presents potential solutions, and applies solutions to sectors and regions. By committing to an 80% cut in greenhouse gas emissions by 2050, the UK has placed itself firmly at the forefront of the global effort to address climate change. The European Union Emissions Trading System (EU ETS) is central to this effort in the UK and across the EU, providing an essential incentive for cutting emissions in industry at the lowest possible cost. But this environmental leadership has raised worries that curbs on emissions will harm the competitiveness of UK and EU businesses, especially heavy industries facing a carbon price under the EU ETS. Our previous studies on the EU ETS have explored this issue of competitiveness and found that the overall risks to the UK economy are small. However, a few key sectors could lose market share and investment to producers outside the EU, allowing emissions and economic activity to 'leak' overseas. This 'carbon leakage' is a real concern in these sectors, for many of the companies we work with, and for UK business more generally. This study builds on our earlier work on competitiveness impacts and carbon leakage. It contains more detailed analysis reinforcing the conclusion that the carbon leakage problem is limited in scope and scale, but it nevertheless could undermine the effectiveness of the EU ETS in key and high-emitting sectors.