Carbon Leakage Research Articles

A Matching Policy to Address ESG and Non-ESG Risks Impacted by a Relocation Policy in China’s Chemical Industry

China’s chemical industry has faced severe environmental, social, and governance (ESG) issues, such as high safety and environmental accidents and risks. To address these issues and promote industrial upgrading, China’s central government has issued a national relocation and improvement policy targeting its chemical industry. However, its countrywide policy implementation may also lead to other ESG risks during the relocation of chemical enterprises, namely industrial transfer. The typical ESG risks that appear to occur in developed eastern region provinces include a one-size-fits-all solution and unemployment, while less developed central and western region provinces may encounter pollution transfer, carbon leakage, environmental injustice, and health disparities. These ESG risks might overlap with other economic and financial (non-ESG) risks, like stranded assets, industry hollowing-out, and debt sustainability issue. These ESG and non-ESG risks could result from potential mismatches between chemical enterprises and chemical parks, categorized as mismatching errors explained by social-ecological systems, behavioral economics, and information economics. To better manage these risks, we propose an ESG matching policy comprising a national standardized ESG scoring and ranking system, a deferred acceptance mechanism, and a score announcement instrument. Such a policy innovation aims at achieving fair and efficient chemical enterprise–chemical park pairs, which would help manage both ESG and non-ESG risks and provide a just transition toolkit for China and other developing countries.

Emissions Reduction Effects and Carbon Leakage Risks of Carbon Emissions Trading Policy: An Empirical Study Based on the Spatial Durbin Model

China’s carbon emissions trading policy represents a significant institutional innovation designed to advance the country’s economic and social development towards sustainability and low-carbon growth. This study investigates the effects of China’s carbon emissions trading policy by employing the difference-in-differences model and spatial Durbin model, using provincial panel data spanning from 2005 to 2020. We find that the carbon emissions trading policy can inhibit per capita carbon emissions in the pilot areas. This work is primarily driven by green technological innovation and the upgrade of industrial structure. Furthermore, the carbon emissions trading policy exhibits a positive spatial spillover effect, inhibits per capita carbon emissions in the areas adjacent to the pilot through demonstration effect and competition effect, and does not cause carbon leakage. These findings reveal the policy’s effectiveness in emissions reduction, and may be useful reference for promoting sustainable economic and social development. This is of great practical significance for exploring how to optimize environmental governance measures, avoid carbon leakage, and achieve balance and fairness in responsibilities in achieving low-carbon sustainable development. Our study proposes policy recommendations for synergizing the national trading market in China.

Observed carbon decoupling of subnational production insufficient for net-zero goal by 2050

Historically, economic growth has been closely coupled to carbon emissions responsible for climate change, but to stabilize global mean temperature, net-zero carbon emissions are necessary. Some economies have begun to reduce emissions while continuing to grow, but this decoupling is not fast enough to achieve global climate targets. Subnational climate actions seem to be crucial for the achievement of these targets. Here, we uncover the effectiveness of subnational efforts by estimating decoupling rates and CO2 emission intensities over the last three decades for over 1,500 subnational regions, encompassing 85% of global emissions, using global data on reported economic output and gridded production-based emissions. Thirty percent of regions with available data have fully decoupled, with higher-income and historically carbon-intensive regions exhibiting higher rates of decoupling and declining emission intensity. Countries of the Organization for Economic Co-operation and Development with greater spending on subnational climate actions show higher decoupling rates, as do subnational regions in EU countries where climate policies have been implemented, highlighting the effectiveness of subnational policies. Moreover, subnational analysis reveals greater variance of decoupling rates within national boundaries than between them and that countries with weaker governance typically show higher variance of decoupling within their borders. If recent rates of production-based carbon decoupling continue, less than half of subnational regions would reach net-zero before 2050, even when accounting for observed acceleration via socioeconomic development and assuming no interregional carbon leakage.

Carbon border adjustments or climate clubs: Impacts on African agricultural sectors under different cooperative scenarios

AbstractDespite the rapid acceleration of climate change, international climate negotiations have yet to implement effective mitigation action. This failure can be attributed to the phenomenon of free‐riding behaviours and the adverse effects of unilateral abatement policies, such as carbon leakage. The introduction of a Carbon Border Adjustment Mechanism (CBAM), as planned by the EU and the creation of climate clubs represent two potential solutions. However, both present uncertainties regarding their trade impacts, effectiveness and equity implications, particularly for developing countries. The outcome of these alternative unilateral or cooperative solutions is analysed using a dynamic CGE model, with a particular focus on the EU‐Africa relations and the agricultural sector. The results indicate that the effectiveness of CBAM in preventing carbon leakage and supporting EU climate goals depends on foreign partners implementing domestic carbon pricing mechanisms. Conversely, for African regions, domestic mitigation efforts and exemption from CBAM can enhance export competitiveness on EU markets while reducing global carbon leakage. Overall, the establishment of climate clubs, coupled with the transfer of technology and the diffusion of best practices in agriculture, can support developing countries and facilitate an inclusive and environmentally beneficial development transition.

Optimal unilateral climate policy with carbon leakage at the extensive and the intensive margins

AbstractWe derive the optimal unilateral climate policy for an open economy with a domestic emissions target and aversion to carbon leakage, distinguishing between leakage at the extensive margin, where domestic firms relocate to foreign countries, and leakage at the intensive margin, where domestic firms lose world market shares. Implementing the optimal allocation requires several instruments including a lump‐sum location subsidy to counter leakage at the extensive margin. Simulations indicate substantial leakage at the extensive margin and a social welfare gain of around 0.3 percent of national income from our optimal leakage‐adjusted tax‐subsidy scheme compared to uniform carbon taxation.

Estimating carbon leakage from aviation by combining sectoral and general equilibrium models

This article describes a procedure for estimating carbon leakage from policies targeting aviation based on alternative scenarios. The key innovation to ensure greater robustness is that all scenarios are simulated by two different types of models: a sectoral model for aviation and a computable general equilibrium model.•The implementation of scenario simulation in both models is explained•The calculation of carbon leakage is explained step by step

Carbon mitigation effect of emission trading product: Perspective from intra-industry carbon leakage

Carbon mitigation within key industries has become a paramount concern in China, yet research focusing on industry-level emissions remains limited despite comprehensive validation of the efficacy of emission trading schemes (ETS) at both enterprise and regional levels. This paper addresses this gap by examining the intra-industry carbon leakage. Firstly, applying multi-period DID method to the industry-level data from 2000 to 2018 in Guangdong province, we empirically find a counterintuitive increase in carbon emissions in the compliance industries despite mitigation efforts by compliance enterprises in the same industries. Secondly, we build a Stackelberg quantity leadership model incorporating ETS and theoretically find that, the intra-industry carbon leakage results in this increased industry-level emissions, notably through the cost crowding-in mechanism. Further theoretical analysis underscores the pivotal role of enhancing ETS coverage ratios for enterprises within compliance industries and bolstering the carbon price mechanism's capacity to accurately reflect enterprises' demand for carbon allowances. Such enhancements are anticipated to effectively mitigate intra-industry carbon leakage and facilitate reductions in industry-level carbon emissions.

The impact of environmental regulations on competitiveness and carbon leakage

A substantial amount of literature investigates environmental regulations and their effect on competitiveness. This often leads to a comparison of the two competing hypotheses: the pollution haven hypothesis and the Porter hypothesis. The former suggests that environmental regulations can positively affect country level competitiveness through green research and development, while the latter proposes that environmental regulations negatively affect competitiveness through higher production costs. In this paper, we argue that the comparison between these two hypotheses should not only be limited to competitiveness alone but should also include a focus on carbon leakage. We use a two-area stock–flow consistent macroeconomic model calibrated to match key variables for the Danish economy. We incorporate the effects of both the pollution haven and Porter hypotheses within the model. As an environmental regulation is implemented in the Danish economy, we find an immediate negative effect on competitiveness, but as the innovational process is allowed time to play in, as suggested by the Porter hypothesis, the effect on competitiveness turns positive. Furthermore, we find negative carbon leakage rates when the effects of the Porter hypothesis are included together with the pollution haven hypothesis, contradicting the quite large positive estimates found for small open economies in the current literature. We find that the negative carbon leakage rates are a result of including the empirically validated effects of the Porter hypothesis, which are excluded in the current literature.

EXPERIENCE WITH GREENHOUSE GAS EMISSION ALLOWANCE ALLOCATION AND ANALYSIS OF LESSONS FOR VIET NAM

This study analyzes and synthesizes international experiences in allocating greenhouse gas emission quotas, drawing lessons for Viet Nam's developing carbon market. The research examines emission trading systems (ETS) and quota allocation methods from various countries and regions, including the European Union, Germany, Austria, the United Kingdom, Switzerland, the United States, Canada, Nigeria, Kenya, South Africa, China, Japan, and New Zealand. Key findings highlight the importance of diversifying allocation methods, combining free allocation, auctioning, and benchmarking approaches. The study emphasizes the need for flexibility in system design, adapting to specific economic and social conditions of each country. Lessons learned include prioritizing high-emission reduction potential sectors, setting reasonable emission caps based on actual data, ensuring transparency in information disclosure, and establishing effective monitoring and evaluation mechanisms. The research also stresses the importance of providing technical support to businesses, especially small and medium enterprises, in complying with ETS regulations. Additionally, the study addresses concerns such as preventing carbon leakage, assessing social impacts, and ensuring international compatibility of the system. These insights provide a valuable foundation for Viet Nam to develop an effective greenhouse gas ETS that aligns with national conditions and sustainable development goals.

Forest carbon payments: A multidisciplinary review of policy options for promoting carbon storage in EU member states

Forest carbon sinks can play an important role in mitigating climate change, but currently only a few policies exist globally where economic incentives are created for forest owners to maintain and strengthen sinks. This article aims to facilitate the design and implementation of governmental payment schemes for forest carbon uptake services by presenting a multidisciplinary analysis of the many challenges involved in such schemes and by proposing potential solutions. We assess the consequences, opportunities, and risks of carbon payment schemes from economic, ecological, social, and legal points of view based on existing literature. Our analysis is set in the context of the European Union (EU), but many of the central findings have relevance for a broader geographical area. The main economic challenges of implementing carbon payment schemes relate to potential leakage, the question of additionality, and uncertain forest-owner behavior. The most important ecological considerations include effects on soil carbon dynamics and biodiversity as well as issues of non-permanence and forest resilience. Our exploration of the social acceptance of carbon payments among the general public, key market actors such as forest owners and forest industry, and other stakeholders suggest that both the process of developing the scheme and its details are significant. Further, our legal analysis indicates that central challenges for carbon payment schemes within the EU rise from the requirement to comply with competition and state aid regulations. Finally, we synthesize our findings and suggest a two-step approach for introducing public carbon payments in an EU member state. Initially, the scheme could be launched via De minimis aid or the new aid scheme (GAFSRA). A low carbon price could be applied to moderate market effects, and the payments could be limited to additional carbon storage only. Peatlands, where tradeoffs exist between tree biomass carbon and soil carbon, should initially be excluded from the standard payment scheme, and regulated with command-and-control instruments and measure-based payments instead. In the future, an improved knowledge base and institutional changes may enable schemes that encompass all ecosystem carbon pools on all relevant soil types and create optimal incentives for both forest management and land-use choices by pricing all land-based sinks and emissions. Such schemes could utilize, e.g., cap-and-trade instruments and be complemented by import tariffs to control carbon leakage.

Exploring sustainable food system transformation options in China: An integrated environmental-economic modelling approach based on the applied general equilibrium framework

Our food system drives global environmental change, and differences in environmental concerns of consumers may cause negative environmental ‘spillover effects’ in less concerned countries. While food system transformation is increasingly recognised as crucial for mitigating such negative environmental spillovers, possible unintended negative environmental consequences in other regions and/or economic sectors have received less attention. Using an integrated environmental-economic modelling framework and scenario analyses, we explored options for more sustainable food systems and to mitigate the negative environmental spillovers from trading partners to China. We found that doubling novel soy-based food (soy-based meat) consumption while reducing pork consumption in China decreased Chinese economy-wide emissions of greenhouse gases (GHGs) by 1 % and acidification pollutants by 3 %. However, it increased Chinese economy-wide emissions of eutrophication pollutants by 2 %, driven by the increased production of soy-based food and other food with relatively high emission intensities of eutrophication pollutants. Combining a dietary shift with the adoption of cleaner cereals production technology for half of the current resources used for cereals production decreased Chinese economy-wide emissions of GHGs by 1 %, acidification pollutants by 7 %, and eutrophication pollutants by 3 %, but required capital reallocation from other sectors. Implementing a unilateral environmental policy in China (i.e., implementing incentive-based emission permits to reduce emissions of all pollutants by 3 % annually) increased economy-wide emissions of GHGs in trading partners by 2 %. This ‘carbon leakage’ emerges due to the shift of production of products with relatively high emission intensities (i.e., nitrogen fertiliser and livestock) from China to its trading partners through international trade. We demonstrate that indirect environmental impacts are crucial to consider when analysing the economy-wide consequences of food system transformations, as these indirect impacts may inadvertently affect other regions and/or economic sectors that were not initially targeted. Our study offers policymakers insights into designing effective policies for more sustainable food systems and sheds light on trade-offs among competing environmental and economic goals.

Carbon Border Adjustment Mechanism (CBAM) Implementation on Reducing Emission in the ASEAN Energy Sector

Abstract In the context of global efforts to combat climate change and transition towards a low-carbon economy, the European Union (EU) has introduced the Carbon Border Adjustment Mechanism (CBAM) as part of its ambitious Green Deal. This mechanism aims to address carbon leakage from high-emitting industries and ensure fair conditions for European industries. The ASEAN region, as highlighted in the 7th ASEAN Energy Outlook (AEO7) study, is projected to experience a substantial increase in greenhouse gas (GHG) emissions, reaching 6,704 Mt CO2-eq by 2050 compared to a baseline scenario of 1,815 Mt CO2-eq in 2020. Consequently, ASEAN has recognized the urgency to earnestly reduce its emissions in response to the global push for carbon neutrality. The implementation of CBAM by the EU has prompted many countries, including ASEAN Member States (AMS) exporting goods to the EU and beyond, to consider the adoption of CBAM policies. This study examines the potential implications of CBAM for the emission reduction in high-emitting industries in ASEAN (such as cement, iron and steel, aluminum, fertilizers, and electricity generation). The findings indicate that the implementation of CBAM may result in higher product prices for these industries, as they will be required to account for the climate footprint of their manufacturing activities through additional fees. However, it also presents an opportunity for emission reductions within these industries by incentivizing the adoption of renewable energy sources to mitigate their carbon footprint during manufacturing processes. To effectively respond to the implementation of CBAM, the region should adopt three key strategies: 1) active participation in and implementation of carbon pricing mechanisms, 2) increased investments in low carbon technologies, and 3) establishment of strategic partnerships to enhance trade relations between the EU and ASEAN.

Carbon Leakage from Fuel Taxes: Evidence from a Natural Experiment

Carbon Leakage from Fuel Taxes: Evidence from a Natural Experiment

The green paradox of time dimension: From pilot to national carbon emission trading system in China

The Emission Trading System (ETS) is essential for China to achieve its emission reduction goals. This paper combines Synthetic Difference-in-Differences (SDID) and Difference-in-Differences (DID) methods, which are more suitable for the Chinese scenario, to assess the comprehensive influence of the China's ETS. The performances of pilot and non-pilot regions confirm the existence of the “green paradox” issue in China's ETS construction. SDID experiments demonstrate that pilot ETSs significantly suppress emissions in pilot regions. However, most emission reduction occurs during the policy announcement period rather than implementation, indicating an emission period-spillover effect. DID estimations illustrate that the national ETS stimulates the emissions in non-pilot regions during the declaration period. The results of China's ETS policies highlighting the emergency to address the policy time lag problem. Further mechanism tests reveal that most effects are driven by changes in energy structure and carbon leakage. Additionally, we conduct heterogeneity tests from over market design and regional attributes. The results show that higher market coverage and stricter penalties in the ETS market can partially alleviate the “green paradox”. Similarly, reducing regional carbon concentration, promoting marketization, and increasing economic openness also have mitigating effects. Based on the obtained results, this paper concludes with policy recommendations.

Research on the Inhibitory Effect of the EU’s Carbon Border Adjustment Mechanism on Carbon Leakage

Associated with more ambitious targets for reducing emissions, the European Union (EU) plans to implement the Carbon Border Adjustment Mechanism (CBAM) fully in 2026, aiming to reduce carbon leakage and competitiveness concerns by imposing tariffs on carbon-intensive imports, which is expected to significantly impact its trade partners. Existing research has focused on CBAM’s impact on macroeconomic indicators but has insufficiently addressed its effects on global and regional carbon leakage, especially in non-EU countries like China. This research offers a detailed analysis of industry-specific leakage rates and integrates both global and regional impacts by employing the dynamic recursive GTAP-E general equilibrium model to numerically simulate CBAM’s inhibitory effect on carbon leakage under different carbon tariff scenarios, while also exploring the synergistic effects of anti-leakage policies in non-EU countries. Our simulations indicate the following: (1) CBAM effectively inhibits carbon leakage, with greater inhibition observed at higher tax rates and with the expansion of covered industries. (2) Establishing China’s domestic carbon market pricing can further reduce regional carbon leakage rates. Implementing global export carbon tax policies will significantly diminish the risk of global carbon leakage. (3) The implementation of CBAM is projected to reduce China’s total exports to the EU, though this loss will be partly offset by trade diversion effects. Carbon-intensive industries are more adversely affected in the short term, while all industries except fossil fuels face inevitable long-term negative impacts.

Carbon Abatement and Leakage in China's Regional Carbon Emission Trading.

Emission trading schemes (ETS) are increasingly becoming a popular policy instrument to balance carbon abatement and economic growth. As a globally unified carbon pricing system has not yet been established, whether regionally operated ETSs cause carbon leakage remains a major concern. Taking China's regional pilot ETSs as a quasi-natural experiment, the study uses the spatial difference-in-differences method to examine how regional ETSs affect carbon emissions in and outside cities of policy implementation. Our analysis finds that China's regional ETS policy contributes to a 6.1% reduction in urban CO2 emissions and a 6.6% decline in emissions intensity in regulated cities, causing carbon leakages that increase CO2 emissions in neighboring cities by 1.7% on average. Our finding further suggests that regional ETSs mitigate local CO2 emissions through outsourcing production, improving energy efficiency and decarbonizing energy structure, whereas the outsourcing of industrial production drives up CO2 emissions in adjacent cities. Moreover, the performances of regional ETSs vary largely by socioeconomic context and mechanism design. China's regional ETSs reduce CO2 emissions more effectively in central and industrial cities but with more severe carbon leakage, while rigorous compliance mechanisms and active market trading help deepen carbon abatement and alleviate carbon leakage.

Border Carbon Adjustments and Leakage in the Presence of Public Pollution Abatement Activities

This paper sheds light on the unidentified effects of unilateral environmental and trade actions within an international trade framework with two large open economies, transboundary pollution, and Public Pollution Abatement (PPA) activities. When private and public abatement coexists in the exporting country, stricter environmental policy by the importing one magnifies the carbon leakage effect. Pareto efficiency dictates that Border Carbon Adjustment (BCA) should account not only for the difference in carbon taxes between the two countries, but also for the policy’s unintended consequences on PPA. More importantly, we argue that a conditional reduction of BCA, subject to stricter environmental policy by the country that exports the polluting good, decreases global pollution and increases countries’ welfare. Such reform strategy generates strong incentives for countries with laxer environmental policy to adopt a stricter one.

Different effects of carbon pricing and border adjustment in Germany and Spain

This study examines the effects of carbon pricing in Germany, Spain, and the broader European context using the dynamic, three-region environmental multisector general equilibrium model, EMuSe. Our findings indicate that unilateral carbon pricing in Germany or Spain leads to a sustained negative output. The marginal increase in production costs outweighs modest reductions in emissions. However, when Europe collectively adopts carbon pricing, the long-term output effects become positive, although there are more significant transition costs due to close trade relations within Europe. We find evidence of carbon leakage, which is marginally mitigated by a border adjustment mechanism. However, this mechanism mainly protects domestic carbon-intensive sectors and produces inconsistent country outcomes; Germany gains, while Spain loses. Notably, Spain’s energy sector emerges as a long-term beneficiary due to its relatively lower emission intensity. The findings highlight the strategic importance for Europe to engage global partners in carbon pricing as it reduces the economic downturn phase and increases long-term gains.

Challenges and Controversies to the European CBAM from a Legal Perspective

The Carbon Border Adjustment Mechanism (CBAM), proposed by the European Union to combat carbon leakage, presents a complex landscape of opportunities and challenges in the realm of global climate governance. This paper explores the problems and controversies surrounding CBAM, including potential WTO incompatibility, violations of UNFCCC principles, and complexities in carbon accounting. It also examines the potential impact of CBAM on developing countries and offers a range of suggested solutions. These solutions encompass designing domestic carbon markets in alignment with the European model, implementing policy and regulatory reforms, fostering China-European bilateral relations, and emphasizing international cooperation and adherence to established legal frameworks. Additionally, at the enterprise level, strategies to invest in green technologies, establish comprehensive carbon accounting systems, and adapt to the evolving low-carbon economy are proposed. By addressing these challenges and embracing these strategies, nations and businesses can contribute to a more sustainable and equitable global climate governance framework.

The Illusion of Science-Based Targets in Tackling Scope 3 Emissions and Supply Chain Carbon Leakage

The Illusion of Science-Based Targets in Tackling Scope 3 Emissions and Supply Chain Carbon Leakage