Climate policy and international trade – A critical appraisal of the literature

Abstract

This paper provides a review of the recent academic literature on how individual countries or regions can successfully implement unilateral climate policies in an increasingly integrated world economy. It first reviews the theory, empirics and future projections of ‘carbon leakage’, i.e. the notion that more ambitious climate policies will pose an incentive for energy-intensive industries to relocate and thus undo at least some of the achieved emission reductions. It then discusses measures to reduce carbon leakage. These include free allocation of emission permits to firms deemed at risk of carbon leakage, targeted trade policies as well as international cooperation to promote climate policies in third countries. Finally, it provides an overview of the debate on responsibility for trade-related emissions, including production- and consumption-based emission accounting as well as some more recent approaches.