EU ETS impacts on profitability and trade: a sector by sector analysis (CTC728)

The EU ETS and other carbon control measures out to 2020 will have negligible impact on the international competitiveness of more than 90% of UK manufacturing activities. Overall, the EU ETS can extend with deeper emission cutbacks in Phase III (post 2012), without damaging UK or European competitiveness, but issues around a few key activities do merit policy attention.

These key activities account for over 50% of manufacturing CO2 emissions, but under 1% of total UK GDP. Moreover companies that receive substantial free allocation but pass carbon costs on to their consumers will generally maintain or increase their profits. However the resulting loss of market share leaks emissions abroad and this makes competitiveness an environmental as much as an economic issue. Total leakage by 2020 is unlikely to exceed 1% of EU emissions, but it could be much higher from some sectors.

Our report combines data on how business costs would be affected by carbon costs with analysis of the effect on prices and international trade in order to identify the small group of activities for which competitiveness is an issue for the environment, as well as for business, and to identify potential responses.