Potential carbon leakage risk: a cross-sector cross-country assessment in the OECD area

Abstract

Achieving climate targets requires more stringent mitigation policies, including the participation of all economic sectors. However, in a fragmented global climate regime, unilateral mitigation policies affecting sectors’ production costs increase carbon leakage risk. Carbon leakage implies reducing the competitiveness of domestic sectors without achieving the full mitigation objectives. Under such circumstances, generating information about sectors’ vulnerability is essential to increase their acceptance of more stringent climate policies and design anti-leakage mechanisms. Our paper calculates and compares potential carbon leakage risk across sectors and OECD countries under varying climate policy scenarios covering GHG emissions along global supply chains. To measure this risk, we use the emission-intensity and trade-exposure metric and emission data including CO2 and non-CO2 gasses. Our results show that agri-food and transport sectors, usually lagging behind in countries’ national climate mitigation policies, could have an even higher carbon leakage risk than energy-intensive industries. Furthermore, we find that this risk can be higher in many downstream sectors compared to directly regulated sectors and is highly heterogenous across OECD countries.