Risk Of Carbon Leakage Research Articles

Carbon Leakage Concept after Carbon Pricing & Green Deal Policies

As part of the European Green Deal, EU nations are required to decrease their carbon emissions by 55% by 2030 and reach carbon neutrality by 2050. The EU's emissions trading system is the cornerstone of this goal. In theory, rising carbon prices may cause carbon leakage, or the transfer of economic activity and related emissions from high-carbon economies to low-carbon economies. Losing market share to rivals in international rivalry might result in short-term international carbon leakage. In the long term, it can be accomplished by moving domestic businesses abroad. To date, a variety of tools, including offsets and free allowances granted under the ETS, have been used to support the carbon leakage risk of high-risk industries. This paper develops an international technique, the EU Emissions Trading Scheme (ETS) Phase IV consultation, to produce a sector-level risk assessment of carbon leakage in Türkiye. This methodology combines emissions intensity and trading intensity, two important indicators for assessing carbon leakage risk. Although the former is commonly employed as a measure of a company's exposure to carbon costs, the latter indicates its ability to pass on costs to customers without losing market share. According to the carbon risk study carried out in Türkiye for the aluminium, cement, paper, fertilizer, iron-steel, and ceramics sectors, cement has the highest risk, while paper carries the lowest risk

Implied threats of the Red Sea crisis to global maritime transport: amplified carbon emissions and possible carbon pricing dysfunction

Recent military acts in the Red Sea and Gulf of Aden are forcing merchant ships to reroute, thereby driving up international shipping rates, prolonging delivery dates, and causing additional greenhouse gas emissions. Utilizing the European Union (EU) Monitoring, Reporting, and Verification emissions database and real time Automatic Identification System data, this study conducted frequency analysis and causative investigation on container ships circumnavigating the Cape of Good Hope. The findings indicate that the current policy framework under the EU Emissions Trading System (EU-ETS) poses a higher risk of carbon leakage, particularly for medium and small-sized container ships, thereby undermining the effectiveness of the nascent EU maritime carbon pricing. If the crisis continues, combined with anticipated tighter emission regulations, this risk is expected to escalate. International maritime policy administrators should make timely adjustments in response to the chain reactions caused by war, enhancing the robustness of cross-regional carbon pricing.

When Are Carbon Border Adjustment Measures Just?

Arguments in support of carbon border adjustment measures are often based on considerations of justice. Implementing carbon border adjustment measures would be necessary to, first, promote fair competition between corporations and, second, make carbon pricing instruments more effective and thus prevent the harms of dangerous climate change. Yet, both arguments tend to obscure considerations of distributive justice relative to the burdens of climate policies and the benefits of economic cooperation. In this article, we first explain why the case for carbon border adjustment measures based on the ideal of fair competition between corporations is flawed. Second, if the priority of harm avoidance over fair burden-sharing can justify carbon border adjustment measures, we argue that it does not justify all kinds of carbon border adjustment measures. On the contrary, it puts significant constraints on their design. We contend that just carbon border adjustment measures should include design features that allow for some form of carbon leakage risk, either via country-differentiated prices or via country-specific exemptions.

A Spatial Equilibrium Problem for the European Pulp and Paper Industry Under the Emission Trading System

AbstractWe propose a spatial equilibrium problem for a pulp and paper supply chain network under the Emission Trading System (ETS) and the circular economy principles. The developed closed-loop supply chain model, based on the variational inequality theory, accounts for the forest deployment and the production of paper using both virgin pulp and recyclable paper waste in an area that is subject to the ETS. In addition, it considers the exchanges of virgin pulp, paper, recyclable and not-recyclable paper waste between this regulated area and geographical zones where no environmental policies apply. The aim of this paper is to investigate the ETS impacts on the pulp and paper industries located in an environmentally regulated area in terms of operating costs, production and trading volumes of the aforementioned commodities, and emissions generated. The case study focuses on the European pulp and paper companies, which are among the energy-intensive industries deemed to be exposed to the carbon leakage risk as a consequence of the ETS application. Sensitivity analyses on the carbon price value and on the trade flexibility are conducted. Our results show that the ETS implies additional costs for the European pulp and paper companies and induces them to resort more on imports of virgin pulp and paper from not-regulated zones.

Emissions trading system: bridging the gap between environmental targets and fair competition

The effectiveness of the European Emissions Trading System in supporting a level playing field while reducing total emissions is tested. While data show a robust impact on the environment as a steady decrease in carbon emissions is observed, it is reported that its ability to internalize emission costs may improve to better address the import of extra European generated emissions that negatively impact the economy when not properly accounted for. Analyzing data in six European countries between 2016 and 2020, the results suggest competitive advantages for industries with higher extra-European imports of inputs that result in biased production costs that, in turn, alter competitive positioning. The novelty lies in focusing on the threats to fair competition within Europe along with the well-known carbon leakage risk widely investigated by previous literature. Complementary policy tools capable of internalizing emission costs, regardless of their origin, are necessary to improve the healthy functioning of the system. In this regard, carbon taxation may outperform carbon border adjustment, as it is based on consumption patterns. Our results can aid policymakers in designing impact analyses aimed at limiting potential distortions to Europe’s level playing field.

Carbon Border Adjustments: A Legal Tool for Mitigation or a Barrier to Justice?

Abstract For the past two decades scholars and policymakers have argued that carbon border adjustments (cbas) may remove the risk of carbon leakage. This article examines two of the legal and moral issues relevant to cbas to better understand how cbas may be implemented to support climate change mitigation goals. World Trade Organization compliance represents a conundrum for policymakers. Although a cba may prove meaningful for greenhouse gas emission reduction, it could also lead to trade tensions if viewed as a disguised restriction on international trade. The impact of cbas on Global South nations also presents a concern in terms of fairness and climate justice. In this respect, in addition to undesirable economic impacts, it is increasingly accepted that support must be provided to least-developed countries in order to achieve global net-zero emission targets. cbas do not necessarily provide this. Ultimately, there are pathways forward to ensure that trade tensions are minimized and fairness and equity are achieved in implementing cbas. As action on climate change mitigation is urgent, this pathway forward must be carefully but rapidly navigated.

Utilization of Free Trade Agreements to Minimize Costs and Carbon Emissions in the Global Supply Chain for Sustainable Logistics

Background: Since global warming is a crucial worldwide issue, carbon tax has been introduced in the global supply chain as an environmental regulation for the reduction of greenhouse gas (GHG) emissions. Costs, GHG emissions, and carbon tax prices differ in each country due to economic conditions, energy mixes, and government policies. Additionally, multiple countries have signed a Free Trade Agreement (FTA). While FTAs result in their economic benefit, they also increase the risk of carbon leakage, which increases GHG emissions in the global supply chain due to relocation production sites from a country with stricter emission constraints to others with laxer ones. Method: This study proposes a mathematical model for decision support to minimize total costs involving carbon taxes with FTAs. Results: Our model determines suppliers, factory locations, and the number of transported parts and products with costs, FTAs, carbon taxes, and material-based GHG emissions estimated using the Life Cycle Inventory (LCI) database. The FTA utilization on the global low-carbon supply chain is examined by comparing the constructed supply chains with and without FTAs, and by conducting sensitivity analysis of carbon tax prices. Conclusions: We found that FTAs would not cause carbon leakage directly and would be effective for reducing GHG emissions economically.

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

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.

The prospects for, and implications of, emissions trading in shipping

The decarbonisation of shipping has become a high priority on the environmental and political agenda. The prospect of implementing an Emissions Trading System (ETS) for shipping has come to prominence as a proposed mechanism for speeding up the decarbonisation of the industry, with the EU taking proactive action to include shipping within the EU ETS by 2023. This paper analyses and provides a qualitative review of the historical development of the discussions and actions taken at both global level (by the International Maritime Organization (IMO)) and at regional level within the EU. A SWOT analysis of the potential implementation of an ETS for shipping is then presented. The paper concludes that an ETS for shipping can incentivise greater investment in, and deployment of, green technologies that will have the effect of reducing the carbon footprint of the shipping industry. However, the speed and significance of this effect will depend upon the specific shipping market segment and the relative stage in shipping market cycles over time. It is further concluded that despite the imminent unilateral introduction of shipping into the EU ETS, it is important that the IMO continues its work to develop a global ETS that promotes a ‘level playing field’ for competition within the sector and eliminates the risk of carbon leakage.

Sustainability, emission trading system and carbon leakage: An approach based on neural networks and multicriteria analysis

Two transitions, green and digital, are changing the operations and strategies of industrial systems. At the same time, businesses are challenged to be globally competitive. Europe has a very ambitious agenda as it aims to be the first climate-neutral continent in 2050. The european emissions trading scheme (EU ETS) has proven to have facilitated the reduction of significant amounts of greenhouse gas emissions, but the risk of carbon leakage is present. This work seeks to explore these issues and their relationships. Through the use of a long short-term memory (LSTM) neural network, a model is built to determine the price of european union allowance (EUA) as a function of different financial energy futures. The results show that the model is very robust and the EUA tends to vary between 78 and 91 €/tCO2. In addition, a multi-criteria decision analysis (MCDA) is applied to identify the best policy alternatives to enable businesses subject to the EU ETS to be competitive in global markets. The analysis is carried out with the help of academic and industrial experts and it emerges that the criteria considered most relevant are two: (i) public expenditure and its expected benefits and (ii) the industrial ecosystem. The policy implications identify that bonuses should be provided to businesses for innovative solutions that protect both the energy and raw material components. The framework of the 3E (Energy Efficiency, Renewable Energy, and Circular Economy) are critical to businesses' long-term strategies, flanked by digital development.

Does the Risk of Carbon Leakage Justify the CBAM?

Does the Risk of Carbon Leakage Justify the CBAM?

Study Explores Potential of Carbon Leakage in Denver-Julesburg Basin Wells

_ This article, written by JPT Technology Editor Chris Carpenter, contains highlights of paper SPE 210256, “Wellbore-Integrity Impact on Carbon Leakage To Ensure Safe Geological Sequestration,” by Yanrui Ning, SPE, and Ali Tura, Colorado School of Mines. The paper has not been peer reviewed. _ In the complete paper, poorly understood leakage potential is researched to quantify the carbon-leakage rate along one legacy well when carbon is injected into a storage formation in the Denver-Julesburg (DJ) Basin. The authors’ results indicate that, for secure carbon sequestration, a good geological storage site should be kept away from wells that have a surface casing depth of 476 ft or shallower and that were drilled before 1994. The effective well permeability highly affects leakage rate, suggesting the importance of estimating the most-representative value or range for this parameter. Introduction To estimate risks associated with geological carbon storage, the National Risk Assessment Partnership (NRAP) Open-Integrated Assessment Model (IAM) tool used in this study presents a modeling approach that can couple efficient reservoir and wellbore components with low computational cost. Two wellbore model components, the open-wellbore model and the multisegmented-wellbore model, were studied to estimate the leakage rate during and after carbon-injection operations. The effective permeability of the disturbed zone outside the well casing is an important parameter in leakage models. However, estimating a reasonable range for the effective well permeability of the disturbed zone remains a challenge. For this study, a more than 1-sq-mile section in the Wattenberg Field of the DJ Basin was used. The goal was to quantify the leakage rate when carbon dioxide (CO2) escapes through a well 1,100 ft from the CO2 injector. First, a reservoir simulation model was built to reflect the pressure and saturation changes during the 30-year injection period and the 100-year postinjection period. This model, based on an ongoing field study, included the CO2 injector, the legacy well that is the potential pathway of CO2 leakage, and the carbon storage formation. Study Area Carbon Storage Potential in Colorado. The top-ranked CO2 emission facilities in Colorado are above the DJ Basin. According to carbon-emission data, 13 facilities in Colorado, including five coal plants, emitted more than 0.7 million tons of CO2 in 2020. All the coal plants are scheduled to be retired by 2034. All eight CO2 emission facilities are in the DJ Basin, with half of those in the Wattenberg Field. This makes the DJ Basin, especially the Wattenberg Field, a good target for carbon storage. The stacked formations of oil and gas reservoirs and saline aquifers in the DJ Basin are potential CO2-storage formations. The current drilling activities with multistage fracture stimulation of horizontal wells target the oil- and gas-producing zones of Niobrara through Greenhorn. These oil and gas producers penetrate the shallower Pierre sandstone formation. This study quantifies the carbon-leakage risk when the Pierre sandstone is the carbon-storage formation and when one nearby Niobrara legacy well penetrates the storage formation and may behave as a potential leakage pathway.

(Re)framing Responsibility? Assessing the Division of Burdens Under the EU Carbon Border Adjustment Mechanism

As part of its highly anticipated Fit for 55 Package, in July 2021 the European Commission introduced a proposed regulation establishing a carbon border adjustment mechanism (CBAM). The CBAM places a price on carbon embedded in imports from certain energy-intensive sectors, and is intended to combat the risk of carbon leakage arising from the gap between EU climate ambitions and those of trading partners. In the words of Commission President von der Leyen, ‘carbon must have its price – because nature cannot pay the price anymore’. This raises the question, however, of who should pay it instead. From the EU’s perspective, the proposed CBAM reflects the EU’s ‘responsibility to continue playing a leading role in global climate action’ through reducing its global GHG footprint in line with the Paris Agreement. However, several newly industrialised countries have attacked the proposal as discriminatory and contrary to the principles of equity and common but differentiated responsibilities and respective capabilities (CBDRRC). Against this backdrop, this article assesses how the EU’s framing of responsibility fits within the applicable public international law framework. First the article examines how the EU’s faming of ‘responsibility’ fits within the law of state jurisdiction, which conditions regulators’ competence to place burdens on actors beyond their territory. It then turns to the division of responsibilities under the UN climate agreements, with a particular focus on opportunities for incorporating a more equitable differentiation of burdens in line with CBDRRC. Such differentiation would only be feasible for regulators if it could pass the obstacles posed by the law of the World Trade Organisation (WTO). Unpacking the challenges and opportunities, it is argued that these hurdles need not be insurmountable, though much would depend on the willingness of both the EU and the WTO dispute settlement body to accommodate competing trade and environmental interests.

Optimal carbon taxation in EU frontrunner countries: coordinating with the EU ETS and addressing leakage

ABSTRACT Several EU countries have targets for the reduction of CO2e emissions that go beyond the target set by the EU. We study what would be the optimal carbon tax policy in such EU frontrunner countries, focusing on two questions: 1) How should national climate policy be coordinated with the European Emissions Trading System (ETS), and 2) How should an EU frontrunner country address the risk of carbon leakage? We show that these issues are closely linked and that the answers to the two questions depend on the following factors: i) The shadow cost assigned to carbon leakage, ii) The rates of carbon leakage in the ETS and non-ETS sectors, and iii) The price of ETS emission allowances relative to the domestic marginal abatement cost of attaining the desired reduction of domestic emissions. Our analysis shows that it is preferable for an EU frontrunner country to implement a national ETS sector carbon tax that results in a higher total carbon price in the national ETS sector compared to the national non-ETS sector. We illustrate how our theoretical model can be combined with a modified version of the GTAP-E general equilibrium model of the world economy to estimate the parameters of the optimal national carbon tax scheme in an EU frontrunner country, using Denmark as an example. We find that the ETS sector should pay a total carbon price that is between 33 and 78 percent above that of the rest of the economy depending on the aversion to carbon leakage. Key policy insights It is generally optimal for an EU frontrunner country – one with a domestic emission target beyond that set by the EU – to implement a national ETS sector tax. The total national carbon price should be higher in the ETS sector compared to the non-ETS sector. Data for Denmark indicate that the total national ETS sector carbon price should be at least 33 percent higher than that of the national non-ETS sector.

A questionnaire based study on the status quo and future action over the regulation of marine greenhouse gas emissions in Hong Kong

Ships contribute to global greenhouse gas (GHG) emissions, with their environmental effects being of particular concern in port cities such as Hong Kong (HK). HK aims to achieve carbon neutrality before 2050, and therefore the ongoing targets for reducing emissions from shipping must be in line with this aim. This article results from conducting a questionnaire-based study on the current regulatory measures in HK, followed by a discussion of whether it is appropriate and necessary to adopt any new measures. It discovers that most of the respondents in our survey are satisfied with the current regulatory measures, which are comprised mainly of the International Maritime Organization (IMO) technical and operational measures, and that they are also willing to accept any new IMO measures. However, the stakeholders have mixed concerns about adopting the suggested market-based measures as a complementary measure for combating marine emissions. We suggest that it is still necessary for HK to consider additional measures that will obviate any risk of carbon leakage from shipping and that will at the same time promote a level playing field for the sustainable development of shipping.

The influence of environmental regulation on the FDI location choice of EU ETS-covered MNEs

This paper explores how cross-country differences in environmental regulatory stringency among member states of the world's largest multinational cap-and-trade system, the European Union Emission Trading Scheme (EU ETS), influenced the FDI location choice of listed multinationals (MNEs) regulated by the environmental policy. After controlling for other country characteristics driving FDI location choice, we find that the likelihood of EU ETS-covered MNEs locating new FDI projects in less environmentally stringent member states strongly depends on firm- and industry-specific environmental characteristics during the system's first two phases. Our results are robust to different measures of environmental stringency and provide evidence for the existence of an intra-regional pollution haven effect (PHE). This investment behavior by MNEs is, moreover, only found in the industries least compensated for the environmental costs induced by the policy. This suggests that the EU inadvertently promoted an intra-regional PHE not only by allowing cross-country variation in environmental stringency but also by overly focusing on and compensating for external carbon leakage risk. Our conclusions have major implications for countries and regions currently establishing or implementing an emissions trading system.

The International Dimension of the EU Emissions Trading System: Bringing the Pieces Together

Abstract We analyse the international dimension of the EU Emissions Trading System (EU ETS) over the past two decades and in the foreseeable future by reviewing facts and economic theory. The facts mainly concern the international climate change regime and the EU’s relevant experience in international cooperation. Club theory shows how incentives can be created for cooperation on climate mitigation. The linkage of the EU ETS to the Kyoto flexible mechanisms had mixed results: it promoted emissions trading abroad, but the inflow of credits into the EU ETS added to a large market surplus and the environmental integrity of certain credits was problematic. Looking ahead, the ability of the EU ETS to reduce foreign emissions may grow. Key will be whether competitiveness and distributional effects are successfully addressed. The Carbon Border Adjustment Mechanism might help the EU reduce the risk of carbon leakage while incentivising emission reductions in countries exporting to the EU. The EU’s focus on reducing domestic emissions only, suggests we will probably not see new international linkages this decade. However, it cannot be excluded that the EU will revisit its decision and relax the domestic constraint.

EU’s Carbon Border Adjustment Mechanism: Will It Achieve Its Objective(s)?

The European Commission’s proposed carbon border adjustment mechanism (CBAM) aims to prevent the risk of carbon leakage, but it would levy imports even when there is no risk of carbon leakage, which may in turn increase greenhouse gas (GHG) emissions. The proposed CBAM also appears to cite the intermediate objective of ensuring a ‘level playing field’ for carbon pricing, but it is difficult to see the rationale for retroactively equalizing only the carbon price while ignoring the costs paid by producers to support other policies aimed at curbing nationwide GHG emissions and the costs of reducing the emissions from their own products. These issues essentially stem from the CBAM’s inherent and fundamental constraints in the institutional design that charges for emissions from the production process outside the EU’s jurisdiction and cannot be remedied by superficially tweaking the associated mechanism. The CBAM could be justified under Article XX(g) as a measure ‘relating to the conservation of’ an atmosphere with low GHG density without scrutinizing these issues. However, it is questionable to interpret Article XX(g) as authorizing inefficient resource conservation through unilateral measures, despite the exporting country potentially being able to conserve resources more efficiently. carbon border adjustment mechanism (CBAM), carbon leakage, level playing field, European Union, GATT, border tax adjustment

Risk of Carbon Leakage and Border Carbon Adjustments under the Korean Emissions Trading Scheme

Purpose – This paper examines South Korea’s potential status as a carbon leakage country, and the level of risk posed by the Korean emissions trading scheme (ETS) for Korean industries. The economic effects of border carbon adjustments (BCAs) to protect energy-intensive Korean industries in the process of achieving the carbon reduction target by 2030 through the Korean ETS are also analyzed. Design/methodology – First, using the Korean Input–Output (IO) table, this paper calculates the balance of emissions embodied in trade (BEET) and the pollution terms of trade (PTT) to determine Korean industries’ carbon leakage status. Analyses of the risk level posed by carbon reduction policy implementation in international trade are conducted for some sectors by applying the EU criteria. Second, using a computable general equilibrium (CGE) model, three BCA scenarios, exemption regulations (EXE), reimbursement (REB), and tariff reduction (TAR) to protect the energy-intensive industries under the Korean ETS are addressed. Compared to the baseline scenario of achieving carbon reduction targets by 2030, the effects of BCAs on welfare, carbon leakage, outputs, and trading are analyzed. Findings – As Korea’s industrial structure has been transitioning from a carbon importing to a carbon leaking country. The results indicate that some industrial sectors could face the risk of losing international competitiveness due to the Korean ETS. South Korea’s industries are basically exposed to risk of carbon leakage because most industries have a trade intensity higher than 30%. This could be interpreted as disproving vulnerability to carbon leakage. Although the petroleum and coal sector is not in carbon leakage, according to BEET and PTT, the Korean ETS exposes this sector to a high risk of carbon leakage. Non-metallic minerals and iron and steel sectors are also exposed to a high risk of carbon leakage due to the increased burden of carbon reduction costs embodied in the Korean ETS, despite relatively low levels of trade intensity. BCAs are demonstrated to have an influential role in protecting energy-intensive industries while achieving the carbon reduction target by 2030. The EXE scenario has the greatest impact on mitigation of welfare losses and carbon leakage, and the TAF scenario causes a disturbance in the international trade market because of the pricing adjustment system. In reality, the EXE scenario, which implies completely exempting energy-intensive industries, could be difficult to implement due to various practical constraints, such as equity and reduction targets and other industries; therefore, the REB scenario presents the most realistic approach and appears to have an effect that could compensate for the burden of economic activities and emissions regulations in these industries. Originality/value – This paper confirms the vulnerability of the Korean industrial the risk of carbon leakage, demonstrating that some industrial sectors could be exposed to losing international competitiveness by implementing carbon reduction policies such as the Korean ETS. The contribution of this paper is the identification of proposed approaches to protect Korean industries in the process of achieving the 2030 reduction target by analyzing the effects of BCA scenarios using a CGE model.

Indirect cost compensation under the EU ETS: A firm-level analysis

Decarbonisation implies conversion to electrification with a subsequent increase in electricity consumption. The EU Emission Trading System (EU ETS) compensates firms for the higher electricity costs. We exploit sectoral and country differences in regulation and a unique dataset on beneficiaries to evaluate the impact of EU ETS indirect cost compensation on the performance of aided firms. Receiving compensation for indirect costs does not have a statistically significant impact on labour productivity. Conversely, there is evidence of a negative performance in terms of turnover, value of total assets and employment of beneficiaries. Results suggest that the amounts transferred to firms might not fully compensate for the higher cost of energy in aided countries. However, the negative effects fade in sectors more exposed to carbon leakage risk. As far as aid intensity is concerned, estimates imply that higher compensation amounts improve performance.