11.7.4 Impact of mitigation action on competitiveness (trade, investment, labour, sector structure)

The international competitiveness of economies and sectors is affected by mitigation action (see surveys by Boltho (1996), Adams (1997) and Barker and Köhler (1998)). In the long run, exchange rates change to compensate for a persistent loss of national competitiveness, but this is a general effect and particular sectors can become more or less competitive. In the short run, the higher costs of fossil fuels lead to a loss in sectoral price competitiveness, especially in energy-intensive industries. The effects of domestic mitigation action on a region’s international competitiveness are broken down by the literature into the effects on price and non-price competitiveness. This section covers price competitiveness, while technological spillover effects are discussed in Section 11.7.6 below.

In general, energy efficiency policies intended for GHG mitigation will tend to improve competitiveness (see Section 11.6.3 above). Zhang and Baranzini (2004) have reviewed empirical studies on the effects of Annex 1 action on international competitiveness. They conclude that ‘empirical studies on existing carbon/energy taxes seem to indicate that competitive losses are not significant’. They therefore support the conclusions of the TAR, namely that ‘reported effects on international competitiveness are very small and that at the firm and sector level, given well-designed policies, there will not be a significant loss of competitiveness from tax-based policies to achieve targets similar to those of the Kyoto Protocol.’ (p.589). Baron and ECONEnergy (1997) looked at carbon prices similar to those expected to be necessary to implement the Kyoto Protocol (see 11.4.3.3). They report a static analysis of the cost increases from a tax of 27 US$/tCO₂ on four energy-intensive sectors in 9 OECD economies (iron and steel, other metals, paper and pulp, and chemicals). Average cost increases are very low – less than about 3% for most country sectors studied – with higher cost increases in Canada (all 4 sectors), Australia (both metal sectors) and Belgium (iron and steel).

However, action by Annex I governments (the EU, Denmark, Norway, Sweden, UK) have generally exempted or provided special treatment for energy-intensive industries. Babiker et al. (2003) suggest that this is a potentially expensive way of maintaining competitiveness, and recommend a tax and subsidy scheme instead. One reason for such exemptions being expensive is that, for a given target, non-exempt sectors require a higher tax rate, with mitigation at higher cost.

The impact of mitigation policies on trade within a region and between regions as a result of spillover is linked through capital flows from one country to another (within a region) or from one region to another, as individual investors and firms look for a higher rate of return on their investments which are considered by the receiving countries to be Foreign Direct Investment (FDI). Different market regulations and the flow of goods and services are influenced by mitigation policies, and the resulting spillover make ‘measuring the welfare cost of climate change policies a real challenge, raising difficult issues of micro- and macro-economics: cost-benefit analysis on the one hand, foreign trade and international specialization on the second hand’ (Bernard and Vielle, 2003). Partly for these reasons, the literature is sparse and the effects of different mitigation policies on FDI, trade, investment and labour market development within and between regions and any spillover effects are important areas for further research.