Introduction

The impact of the EU ETS on competitiveness is an issue that emerged months ahead of the launch of the scheme in 2005. Following the conclusion of the first trading period, the debate is as heated as ever – all the more so because rhetoric continues to supersede evidence. Various proposals for border adjustments and other trade measures have now emerged in official debates, and the global economic slowdown is unlikely to make them go away.

The purpose of this chapter is to clarify the primary issues in the competitiveness debate and to share the evidence to date about the impact that the EU ETS has had on the competitiveness of industry. The discussion addresses the impacts observed during the first three years of the EU ETS, and is thus an examination of how the competitiveness of EU installations evolved over the short term.

Competitiveness is a notion that is most useful when applied at a relatively microeconomic level. Krugman, in his article ‘Competitiveness: a dangerous obsession’ (Krugman 1994), warns against the view that nations, like companies, compete against each other, and that their economic problems are attributable to a failure to compete in global markets. Krugman's advice is all the more relevant for an analysis of the EU ETS, whose effects are felt almost exclusively by a subset of economic activities. How, then, does one define competitiveness at the microeconomic level?