Global actions under the Paris agreement: Tracing the carbon leakage flow and pursuing countermeasures

Abstract

Carbon leakage could potentially occur if one group of countries implemented emission reduction policies while others did not. This paper integrates a counterfactual simulation study using a GTAP-E based CGE model with a carbon flow decomposition analysis, thus enabling us to trace the complex paths of carbon leakage numerically. Under the NDC scenarios, the leakage ratios for production-based emission and consumption-based emission is 12.58% and 9.66% respectively. Further decomposing the cross-border carbon flow through forward and backward industrial linkage, this paper finds that even though the net import and export of embodied emissions do not change much with the implementation of Paris Agreement in most developed economies, EU and Asian developed countries do achieve great emission reductions regarding their domestic territorial production-based emissions or consumption-based emissions, and oppositely, United States increase its both emissions under the NDC scenario comparing with BAU scenario. EU, Asian developed counties together with China contribute to the production-based emission reductions mainly by reducing the emissions in producing domestic final goods, and partially by reducing intermediate goods input for producing foreign products. Their consumption-based emission reduction depends on the reduction in meeting final demand by domestic production and also the alleviated reliance on international inflow. India, Russia and rest of the world are the primary contributors to carbon leakage either in terms of the production-base emission or consumption-based emissions. Measures tacking the carbon leakage cannot remove the leakage completely, import tariff would reduce the production-based carbon leakage ratio to 10.25%, while export rebates would even increase the leakage ratio to 13.71%.