This project proposes the first detailed analysis of how climate change policies implemented in one region can simultaneously influence business decisions on innovation and trade activities. It uses UK firm level (micro-)data covering all manufacturing sectors, and asks if UK and EU climate policies indeed help regulated firms to boost innovation activity and exports as intended, or if firms instead react by shifting both production and innovation activity abroad. Specifically, I will focus on two research questions: Q.1 Is there evidence that climate change regulations in the UK cause manufacturing companies to outsource the production of pollution intensive input materials? If so, does outsourcing to low production cost countries lead to higher innovation in these countries (innovation leakage)? And Q.2 Do climate change regulations in the UK increase innovation in clean technologies in regulated companies, and if so, does it improve firms' export competitiveness?

Existing studies fail to find compelling evidence on whether climate policies lead to positive or adverse effects on firms' competitiveness. This is problematic because it makes the issue around competitiveness a highly politicised and contentious one, and prevents countries such as the UK from undertaking more ambitious climate policies to aid the low carbon transformation of their economies.

This project takes a new approach to examining the evidence. Existing research tends to assess impacts of climate change policy on a single measure of competitiveness, be it export volumes, employment or innovation activity. However, jointly assessing how policy simultaneously impacts multiple dimensions of competitiveness has been recently identified as a key gap in the literature (Dechezlepretre and Sato 2014). This is because in the real world, the same policy can have opposing effects on different indicators of competitiveness. This project quantifies the link between two economic adjustments - innovation and trade - as well as the trade-offs between them. This will mark a significant step in deepening our understanding of the highly complex business response to regulation and contribute to improving the design of climate policies, which requires fine-tuning in order to balance multiple policy goals with multiple impacts.

This project will construct and exploit a new and rich micro-database of over 40,000 UK companies in the manufacturing sectors through access to several channels including the host institution, the ESRC funded UK Data Service Secure Lab and the HMRC Datalab. I will construct two core datasets that combines trade (imports and exports), innovation (patenting activity) and basic firm characteristics (economic variables). Using microdata is advantageous not only because competitiveness impacts take place at the level of a company, but also because climate polices tend to concern only a small share of companies within economic sectors. Few other research papers have used the UK microdata in this field of research, making this research unique. The statistical analyses will use a range of data management and advanced econometric techniques which I have developed throughout my PhD and post-doctorate training (e.g. fixed effects panel data estimations, instrumental variables, propensity score matching and non-parametric matching).

The primary beneficiaries of this research are policy makers operating in the area of climate change mitigation. It will inform the design of more efficient policies to control industry emissions by illuminating where policy needs to be strengthened, whether it be more support for innovation or more robust measures against trade distortions. The outcomes of this research will provide new and valuable evidence to support a number of other discussions including the negotiations on liberalising trade in low-carbon goods and policies to boost innovation activity in low carbon technologies.

Potential Impact:
Ultimately, this research aims to contribute towards combating climate change. Specifically, it provides empirical facts on the effectiveness of existing climate change policies regulating UK companies and the consequences on the geography of innovation and trade, to feed into discussions on improving the policy designs. The results therefore also relate to the economic competitiveness of UK industry during its low carbon transition.

The project design is focused around a deliberative process to maximise impact, through various platforms of exchange to engage a wide array of users and beneficiaries. The proposed engagement activities will A) ensure the relevancy of the research in the real world by involving beneficiaries in the development of my research and; B) make the results of my studies known, through dissemination and discussions with the wider stakeholder community. The impact activities will thus increase the quality and profile of this research, and raise my own potential to conduct work with strong societal and economic impact as a Future Research Leader.

The primary beneficiaries of this research are POLICY MAKERS operating in the area of climate change mitigation. Specifically, the findings will inform the process of improving the design of policies to control industry emissions, by illuminating where policy needs to be strengthened. The most direct impact will be achieved in the UK and the EU through strong and direct engagement as well as co-production of knowledge with policy makers. I will set up a scoping and advisory group of around 5 persons including policy makers (e.g. from the UK Department of Energy and Climate Change, Committee on Climate Change and the EU Commission's DG Climate Action) and industry stakeholders (some of whom having already expressed an interest in membership) who will advise me through formal and informal discussions, and ensure the validity and relevance of this work, and advise on opportunities to inform and influence policy. I will also organise a policy workshop half way through the funding period to discuss preliminary results and get early feedback to ensure that my on-going research is up to date with the evolving policy debate. Importantly, the timings of this research (2016-2018) will coincide with the reform process (2015-2018) of the EU Emissions Trading System post-2020 and the outcomes are intended to impact this process.

The results will also likely impact the reform process of climate change policies across all implementing countries (e.g. California, China and Quebec) where debates on the competitiveness impacts of climate policy also abound. I will invite INTERNATIONAL CLIMATE PRACTITIONERS (e.g. climate change representatives from various embassies) to the policy workshop and launch event, to ensure that my research findings obtained from the UK's experience with climate policy as an early adopter, can have far reaching impacts internationally. Communicating research results to climate policy makers worldwide using non-academic dissemination pieces (e.g. press releases, One page policy summary, Policy blogs and a Policy brief) will help in receiving international interest in my research.

If the evidence provided by this research leads to improved policy design that better supports businesses in transitioning towards greener production, the BUSINESSES regulated by climate change policies will also benefit. Initial conversations with my existing network of industry stakeholders confirmed their support for this research, as well as the importance and urgency of its implementation. Other beneficiaries include NGOs and INDUSTRY ASSOCIATIONS that influence the climate policy debate, as they can use the results to formulate their positions in national and international environmental advocacy activities. I will also disseminate the non-academic pieces to these stakeholders and invite key persons to the policy workshop and launch event.