In 2021, the UK launched its own domestic Emissions Trading Scheme (UK ETS) to replace its participation in the EU's equivalent system. This market-based policy caps the total level of greenhouse gases that energy-intensive industries, power generators, and aviation can emit. Over time, the cap is tightened, encouraging firms to invest in carbon-capture technologies or renewable energy. To prevent 'carbon leakage'—where businesses relocate to countries with weaker environmental laws—the government initially granted free carbon allowances to highly exposed sectors like steel and cement.
However, critics argue that these free allocations blunt the incentive to decarbonise. Some environmental groups favor more direct interventions, such as a Carbon Border Adjustment Mechanism (CBAM) or a uniform carbon tax on all industrial fuels. A carbon tax would provide price certainty, making it easier for businesses to plan long-term green investments, unlike the highly volatile prices observed in permit markets. On the other hand, small and medium-sized enterprises (SMEs) often complain about the administrative complexity of tracking emissions.
Furthermore, there is concern that unilateral environmental regulations undermine the international competitiveness of UK manufacturing, particularly against rivals in nations with looser environmental standards. Several prominent manufacturing firms have expressed a preference for the flexibility of cap-and-trade markets over more rigid command-and-control regulations or high direct carbon taxes. Yet, if the UK is to meet its legally binding net-zero target by 2050, more stringent policies across all sectors are inevitable.
'Several prominent manufacturing firms have expressed a preference for the flexibility of cap-and-trade markets over more rigid command-and-control regulations or high direct carbon taxes' (Extract B, lines 17–19).
Using the data and your economic knowledge, evaluate the potential impact on UK businesses of government policies designed to reduce industrial carbon emissions and environmental damage.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.