The relationship between a ‘polluter pays’ approach to carbon capture, regional policy and ‘just transition’ employment agendas

Policy makers in a number of nations are currently developing carbon capture and storage (CCS) as an industrial decarbonisation solution, linking capture potential in industry clusters to domestic or overseas offshore storage capacity. However, the design, focus and timeframe for policy support are proving challenging in countries like the UK, where industry actors are concerned about the competitiveness implications of additional operational capital costs, while government aims to offer only transitory policy support. Policy-facing research is required to understand the drivers, nature and extent of potential competitiveness loss from adopting carbon capture in specific industry and country contexts, along with the impacts of policy decisions in other countries and of possible future technology improvements. We consider the case of the UK chemicals industry, using an economy-wide computable general equilibrium (CGE) model. This highlights how macroeconomic and sectoral impacts of concern under regional, industry and climate policy agendas depend on domestic and export demand responses to changing industry prices. A crucial question is whether capture costs are similarly reflected in international prices. We identify a risk of policy commitment to ‘polluter pays’ having sustained negative outcomes for capture firms, along with offshoring/leakage of jobs and GDP, and associated emissions, as demand shifts to lower cost overseas production. However, such costs could be reduced, and some capture industry gains realised, if competitors in other nations ultimately follow in bearing similar costs and particularly if ‘early mover’ action enables firms to make efficiency gains and build comparative advantage in operational carbon capture.Key policy insights A ‘polluter pays’ approach to industrial carbon capture risks triggering potential ‘offshoring’ of manufacturing activity in all timeframes where increased operational costs reduce the relative competitiveness of capture firms.A border tax risks worse industry and wider economy outcomes, where domestic production is intensive in imports of the commodity in question.Transitory policy support should focus on enabling capture firms to build efficiency in using carbon capture equipment while sustaining competitiveness and jobs within regional industry clusters.Opportunities should be explored to develop comparative advantage where policy activity involves ‘early mover’ action on carbon capture.