Is an ambitious CO2 policy harmful for the competitive position of Europe?

Lobbyists argue that more ambitious climate policies will harm European businesses. They argue that companies will find it too expensive to continue their production activities in Europe and as a result displace their industrial activities to countries with less stringent environmental laws. The phenomenon of ‘carbon leakage’ is however severely overestimated. Up to this point ‘carbon leakage’ has not, or has hardly, occurred. There is no scientific evidence that concludes that Europes Climate policy has led to carbon leakage, not that it is likely to happen in the future once free allocation has ended.  

Moreover, for most companies the prices of their products hardly increase because of them having to buy CO2 emission permits. This too could change in the long run, but for now these costs only constitute a small portion of their total production costs. It therefore is unlikely that their competitive position is at risk. Take the cement industry: they currently don't have any serious international competition; however, they do get free CO2 emission permits.

A new development is the proposal by the European Commission (July 2021) to protect the competitive position of European Industry by introducing a Carbon Border Adjustment Mechanism. If this proposal is adopted, companies importing certain goods will have to pay for the CO2 emitted during its production abroad, similar to the price of the CO2 certificate in Europe. This creates a level playing field between European and foreign companies when it comes to the costs of CO2 in their prices. 

Additionally, non-EU countries are increasingly taking measures against the production of greenhouse gasses. Several countries, including South Korea and China, have (a version of) an emissions trading scheme, or are working on it. Global policies on the reduction of greenhouse gasses will only become more stringent and will be implemented in growing number of countries. Relocating production thus is pointless in the long run.

The reduction of CO2 emissions is a costly enterprise that requires plenty of effort, but on the other hand it means that countries avoid damage and can take advantage of a forerunner position. Tackling the CO2 problem also boosts the energy transition. This brings about innovation and creates new employment opportunities.


Emission trading