Current policies to tackle climate change by reducing UK annual emissions of greenhouse gases, including the Fourth Carbon Budget for the period 2023-2027, have not damaged the competitiveness of businesses, according to a new review of the economic evidence published today (7 July 2014) by the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science.
The report by Samuela Bassi and Dimitri Zenghelis also points out that the UK’s climate change policies can increase the competitiveness of the UK in the long term by encouraging greater innovation and efficiency.
The authors examined a number of studies which suggested that climate change policies could, in theory, lead to a small number of companies re-locating from the UK to countries with less stringent policies to reduce emissions. However, they also found that recent studies documenting the actual impacts of climate change policies show that carbon prices have not been high enough to prompt any detectable re-location by companies.
The report states: “Arguments in favour of revising the Fourth Carbon Budget, based on concerns about competitiveness, do not appear to be supported by the evidence. Existing data suggest that the impact of current policies is small or negligible, dwarfed by a range of other economic factors.”
The Department of Energy and Climate Change announced in December 2012 that the Government would review the Fourth Carbon Budget in early 2014 and would revise it upwards if it found that “our domestic commitments place us on a different emissions trajectory than the EU ETS trajectory agreed by the EU”. Some politicians have suggested that the level of the Fourth Carbon Budget could hurt the competitiveness of UK businesses. The outcome of the review of the Budget is due to be announced by the Government this summer.
The Fourth Carbon Budget was agreed by Parliament in June 2011, following the recommendation of the expert independent Committee on Climate Change that it should require UK annual emissions to be 50 per cent lower in 2025 compared with 1990. Provisional estimates suggest UK annual emissions of greenhouse gases in 2013 were 26.7 per cent lower than in 1990, but the Committee on Climate Change has warned that the current rate of emissions reductions is not consistent with achievement of the Fourth Carbon Budget.
The report by Bassi and Zenghelis also notes that, as carbon prices rise in the future, the Government may need to offer temporary help to some companies which use a lot of energy. The report states: “Domestic, as well as international, carbon prices are expected to increase, and with time this could have serious implications for a small group of energy-intensive businesses. Some businesses will naturally exit the market as demand for carbon-intensive goods and services is expected to gradually fall. But policy tools are available to ensure that strategic vulnerable sectors are not put out of business prematurely by the application of more ambitious domestic climate change policies.”
Opportunities to increase competitiveness could also arise from reductions in greenhouse gas emissions, the report concludes. It states: “Well-designed climate change policies could offer business opportunities in fast-growing global markets, as countries, such as the United States, China and Member States of the European Union, implement ever more stringent carbon reduction and energy efficiency policies. The UK is well-positioned to benefit from a global transition to a more resource-efficient and renewable economy, provided flexible structural policies allow it to use its comparative advantages.