Climate Change and Competitiveness

This briefing paper examines the perceived tensions between climate change mitigation efforts under the Kyoto Protocol and the economic competitiveness of firms and sectors. It distinguishes between the 'non-Party problem,' where firms in participating countries face disadvantages against those in non-participating nations, and the 'implementation problem,' where differing national strategies within participating regions create internal competitive imbalances. Using Canada and the EU as case studies, the document argues that while these concerns are politically significant, their actual economic impacts may be limited by flexibility mechanisms, sub-national actions in non-participating countries, and potential technological innovations driven by regulation.

• The document defines competitiveness at the firm or sectoral level as "sustainable profitability – a state that is maintained in a dynamic contest among firms," arguing that the concept has little meaning when applied to nation states as a whole.
• Three variables are identified as a screen for assessing competitiveness impacts in any sector: energy intensity (where sectors like aluminum are vulnerable due to energy comprising more than 30% of production costs), the ability to pass cost increases to consumers (influenced by substitutes and monopoly power), and opportunities for low-cost abatement.
• The 'non-Party problem' refers to the risk that firms in Annex B Parties face an "uneven playing field" because competitors in non-Annex B Parties, such as the US or large developing countries, are not subject to carbon constraints.
• In Canada, concerns about the US's non-ratification of the Kyoto Protocol are significant because approximately 85% of Canada's trade is with the US, and 63% of Canada's total manufacturing output is destined for the US market.
• The 'implementation problem' occurs when Annex B Parties create "unfair competitive advantages" for domestic industry through the specific way they allocate emissions reductions. In the EU, the Carbon Trust found that proposed allowances in national allocation plans (NAPs) often exceed current needs, creating potential for shifts in intra-EU competitiveness, particularly in the steel sector.
• Analysis of the EU's Emissions Trading System (ETS) suggests that 'leakage'—the relocation of industry outside the region—is a minimal concern for most sectors, with the possible exception of the aluminum sector due to its global market and high energy costs.
• The document suggests that competitiveness concerns in Canada may be mitigated by the fact that some US states, particularly in the North-East and West-coast, are taking climate actions that may be commensurate with Canadian efforts.

APA

International Institute for Sustainable Development (2005). Climate Change and Competitiveness. https://www.iisd.org/system/files/publications/climate_change_comp.pdf

Chicago

International Institute for Sustainable Development. Climate Change and Competitiveness. 2005. https://www.iisd.org/system/files/publications/climate_change_comp.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Climate Change and Competitiveness |date=30 March 2005 |url=https://www.iisd.org/system/files/publications/climate_change_comp.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopment2005climate, author = {{International Institute for Sustainable Development}}, title = {{Climate Change and Competitiveness}}, institution = {International Institute for Sustainable Development}, year = {2005}, month = mar, url = {https://www.iisd.org/system/files/publications/climate_change_comp.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }