Reallocation of economic activity: an underutilised mechanism to reduce carbon emissions

European manufacturing industry has not yet significantly reduced their carbon emissions over recent years. This in contrast to the electricity generation sector.

However, the European Union’s "Fit for 55" package of measures contains ambitious targets for cutting those emissions by 2030. That effort will have to be based not only on innovation but also on technological "catching up" and the transfer of economic activity to the most emission-efficient firms. A limited shift of activities within a sector away from those companies that produce the most emissions, could achieve substantial emission reductions.

In the article "Carbon emissions and the untapped potential of activity reallocation", the authors show that this mechanism, however, contributed little to the emission reductions between 2013 and 2019. A rising CO2 price will encourage this shift, as carbon-intensive businesses may become loss-making.

However, this carbon price-driven redistribution will not necessarily be the optimal redistribution to reduce emissions. This is because the least profitable firms are not always the least carbon efficient. This means that a broader mix of policy measures will be needed to decarbonise the manufacturing sector in a timely manner.