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This paper reviews ex-post empirical assessments on the impact of carbon pricing on competitiveness in OECD and G20 countries, primarily in the European Union, in the electricity and industrial sectors. Most of these assessments find no statistically significant effects of carbon pricing or energy prices on different dimensions of competitiveness, including net imports, foreign direct investments, turnover, value added, employment, profits, productivity, and innovation. When statistically significant results have been found, the magnitude of such effects tends to be small – either positive or negative. Thus, concerns about negative short-term effects of carbon pricing on firms' or sectors' international competitiveness have not come to pass, at least to date. These findings are in part because carbon price levels have been low and because of exemptions to carbon taxes for industry, or generous levels of free allowances to firms covered by emissions trading schemes. Key policy insights Most of the studies reviewed in this paper find no statistically significant effects of carbon pricing or energy price fluctuations on different dimensions of competitiveness (employment, profits, net imports). When statistically significant results have been found, the magnitude of such effects is small. This is not surprising, because long term trends in overall energy costs have a small effect compared to other trends. Moreover, carbon costs levied on industry have been low, either because of carbon tax breaks or free allowances to firms. Carbon pricing has a small and positive effect on productivity and innovation. In particular, all studies report statistically significant increases in patenting. Studies that find small negative competitiveness effects tend to focus on net imports and outward foreign direct investment. Establishing a positive and stable carbon price (even if initially at a low level) will provide a clear signal of policy direction for participating firms. This may actually reduce risks to competitiveness in the longer-term if it incentivises firms to adopt advanced pollution abatement technologies in an increasingly carbon-constrained global economy. [ABSTRACT FROM AUTHOR]

Lemoine and Rudik (2017) argues that it is efficient to delay reducing carbon emissions, due to supposed inertia in the climate system's response to emissions. This conclusion rests upon misunderstanding the relevant earth system modeling: there is no substantial lag between CO2 emissions and warming. Applying a representation of the earth system that captures the range of responses seen in complex earth system models invalidates the original article's implications for climate policy. The least-cost policy path that limits warming to 2°C implies that the carbon price starts high and increases at the interest rate. It cannot rely on climate inertia to delay reducing and allow greater cumulative emissions. (JEL H23, Q54, Q58) [ABSTRACT FROM AUTHOR]

We exploit recent advances in climate science to develop a physically consistent, yet surprisingly simple, model of climate policy. It seems that key economic models have greatly overestimated the delay between carbon emissions and warming, and ignored the saturation of carbon sinks that takes place when the atmospheric concentration of carbon dioxide rises. This has important implications for climate policy. If carbon emissions are abated, damages are avoided almost immediately. Therefore it is optimal to reduce emissions significantly in the near term and bring about a slow transition to optimal peak warming, even if optimal steady-state/peak warming is high. The optimal carbon price should start relatively high and grow relatively fast. [ABSTRACT FROM AUTHOR]