Meeting the Costs of Decarbonising Industry – the Potential Effects on Prices and Competitiveness (a Case Study of the UK)

Abstract

Industry produces a third of global greenhouse gas emissions and needs to be decarbonised as countries strive for net zero. But how might the costs of this be met and what effect might the options have on businesses and consumers? Using the UK as a case study, we investigate the relative effect on prices and profit margins of three idealised options for distributing the costs of decarbonising industry: (1) absorbing them, (2) passing them on to consumers, and (3) sharing them along the relevant value chains. To do this, we combine direct process cost data from a detailed industry pathway model (covering 115 sector-process combinations and 96 unique low-carbon technologies) with techniques exploiting multi-regional input-output analysis. Industrial decarbonisation consistent with net-zero goals can be achieved with an aggregate increase in prices as low as 0.8%, and minimal impact on equality. However, the impact on some industries is far more pronounced; while costs might be beneficially shared between sectors to some extent, some will find this more challenging. The findings are relevant to industrial decarbonisation policies and the support they need to provide, the effects that industrial decarbonisation might have on equality, and its potential effect on international competition.

Keywords: industrial decarbonisation, carbon costs, carbon border adjustment, decarbonisation costs, industrial strategy, Competition