Carbon Leakage Research Articles

When carbon emission trading meets a regulated industry: Evidence from the electricity sector of China

This paper provides retrospective firm-level evidence on the effectiveness of China’s carbon market pilots in reducing emissions in the electricity sector. We show that the carbon emission trading system (ETS) has no effect on changing coal efficiency of regulated coal-fired power plants. Although we find a significant reduction in coal consumption associated with ETS participation, this reduction was achieved by reducing electricity production. The output contraction in the treated plants is not due to their optimizing behavior but is likely driven by government decisions, because the impacts of emission permits on marginal costs are small relative to the controlled electricity prices and the reduction is associated with financial losses. In addition, we find no evidence of carbon leakage to other provinces, but a significant increase in the production of non-coal-fired power plants in the ETS regions.

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

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.

A Linkage Framework for the China National Emission Trading System (CETS): Insight from Key Global Carbon Markets

Given that international collaborative efforts to reduce greenhouse gas (GHG) emissions are urgent and crucial, a critical understanding of challenges and opportunities of linking China’s newly established national ETS with existing domestic or regional ETSs is essential in order to achieve global emission targets, and may attract other jurisdictions to join in global carbon market development. In this backdrop, we analyzed the experiences, lessons, and insights from three key global carbon markets, namely North America, the EU and China, in terms of the barriers to linking the global carbon market, with a focus on China, using thematic analysis. The four most commonly cited linkage design elements (barriers) were the legal basis; monitoring, reporting, and verification; political feasibility; and the price-management mechanism. Like-minded jurisdictions with similar political views and design features will have a higher chance of linking. Additionally, sustaining market liquidity, widening sectoral coverage, minimizing carbon leakage, ensuring offset quality, and a transparent allowance and cap setting rules are crucial steps towards linkage. These outcomes can be used as an ETS linkage-ready design framework for CETS and ETS under development to overcome barriers to future international ETS linkages.

Agricultural trade shocks and carbon leakage: Evidence from China's trade shocks to the Belt & Road economies

Existing literature on carbon leakage mostly focused on polluting industries or at the national level. Agriculture is one of the main sources of carbon emissions, however, research on agricultural carbon leakage is still insufficient. To fill this gap, this paper investigates the impact of China's agricultural trade shocks on carbon emissions in a panel of 62 economies along the Belt and Road (B&R) over the period 1990–2017. The results show that China's supply shocks have a significant inhibitory effect on the agricultural carbon emissions of the B&R economies, and this inhibitory effect is very stable and will not be disturbed by other factors. On the contrary, China's demand shocks only have a significant inhibitory effect on the carbon emission intensity of economies with a higher proportion of agriculture, but it will significantly increase the agricultural carbon emissions share in all economies.

Integrating Carbon Dioxide Removal Into European Emissions Trading

In one of the central scenarios for meeting an European Union-wide net zero greenhouse gas (GHG) emissions target by 2050, the emissions cap in the European Union Emissions Trading System (EU ETS) becomes net negative. Despite this ambition, no mechanism allows for the inclusion of CO2 removal credits (CRCs) in the EU ETS to date. Amending the EU ETS legislation is required to create enabling conditions for a net negative cap. Here, we conceptually discuss various economic, legal, and political challenges surrounding the integration of CRCs into the EU ETS. To analyze cap-and-trade systems encompassing negative emissions, we introduce the effective (elastic) cap resulting from the integration of CRCs in addition to the regulatory (inelastic) cap, the latter now being binding for the net emissions only. Given current cost estimates for BECCS and DACCS, minimum quantities for the use of removals, as opposed to ceilings as currently discussed, would be required to promote the near-term integration of such technologies. Instead of direct interaction between the companies involved in emissions trading and the providers of CRCs, the regulatory authority could also transitionally act as an intermediary by buying CRCs and supplying them in turn conditional upon observed allowances prices, for example, by supporting a (soft) price collar. Contrary to a price collar without dedicated support from CRCs, in this case (net) compliance with the overall cap is maintained. EU legislation already provides safeguards for physical carbon leakage concerning CCS, making Bioenergy with Carbon Capture and Storage (BECCS) and Direct Air Capture and Storage prioritized for inclusion in the EU ETS. Furthermore, a special opportunity might apply for the inclusion of BECCS installations. Repealing the provision that installations exclusively using biomass are not covered by the ETS Directive, combined with freely allocated allowances to these installations, would allow operators of biomass installations to sell allowances made available through the use of BECCS. Achieving GHG neutrality in the EU by 2050 requires designing suitable incentive systems for CO2 removal, which includes the option to open up EU emissions trading to CRCs.

Decarbonizing China’s iron and steel industry from the supply and demand sides for carbon neutrality

Iron and steel production in China contributes to 14% of China’s total energy-related CO2 emissions. Decarbonizing the iron and steel sector will therefore play an important role in achieving the goal of carbon neutrality. This study explored possible low-carbon transition pathways for China’s iron and steel industry to achieve carbon neutrality by 2050. An integrated approach was developed that combined a computable general equilibrium model and a bottom-up technology-selection module. The results indicated that although energy-saving technologies can reduce CO2 emissions in the short term, in the long term, adopting breakthrough technologies (e.g., carbon capture and storage (CCS) and hydrogen-based direct reduction (DR)), increasing the share of scrap-based electric arc furnace (EAF) steel production, and decarbonizing upstream energy-supply sectors will be crucial for climate change mitigation. Hydrogen-based DR could be an effective option for CO2 emission reduction in scenarios where CCS is not available, with its share increasing to 23%–25% by 2050. System-wide cross-sector decarbonization can help achieve climate targets at lower costs through flexible technology combinations and avoid carbon leakage into upstream energy-supply sectors.

Searching appropriate system boundary for accounting India's emission inventory for the responsibility to reduce carbon emissions

This paper explores the features of accounting for the national carbon emission inventory under four different system boundaries, including the presently operational territorial production-based accounting (PBA) practised by the UNFCCC. Using a recently published input-output table with the base year for 2013–2014, the study calculates India's ‘Nationally Determined Contribution (NDC)’ to the mitigation of carbon emissions using production-based, consumption-based, sharing-based and equity-based accounting. The study finds India as a net importer of carbon emissions, especially for its high emission-intensive capital and energy goods import such that the country is bearing the minimum burden of emission reduction responsibility. However, the study intends to analyse this burden of responsibility in terms of the criteria of justice and effectiveness and addresses the future policy priorities for India to become a net exporter of industrial goods. We recommend India for supporting and implementing an alternative system boundary of emission inventory accounting which would be more consistent with the provisions of 'equity' subscribed under the UNFCCC while at the same time, helpful for achieving the climate goals by appropriately trace and track the sources of ‘carbon leakage’.

Does the emissions trading system in developing countries accelerate carbon leakage through OFDI? Evidence from China

Carbon leakage caused by unbalanced climate policy constraints seriously damages the process of global climate governance. As far as developing countries are concerned, carbon leakage through investment is a more urgent issue. Based on firm level data, we employ PSM-DID to evaluate the impact of China’s pilot ETSs on firm's outward direct investment decision. The empirical results prove that ETS has accelerated both the depth and breadth of outward direct investment from China. The Belt and Road Initiative has facilitated carbon leakage through investment. The host countries without ETS are more attractive than belonging to Belt and Road countries for China's OFDI. The firm's production efficiency, ownership, and marketization level of home region also have important impacts on carbon leakage. China should fully consider carbon leakage in progress of formulating national emissions trading system and actively promote the construction of a green Belt and Road through carbon market linking.

Carbon Leakage: The Impact of Asymmetric Regulation on Carbon‐Emitting Production

Regions with carbon emission regulations bear the risk of “carbon leakage” if local producers shift production capacity to an unregulated region. We investigate the problem for a producer subject to geographically asymmetric emission regulation with uncertain future emission price. The producer has two ex ante options to lower its compliance cost: investing in clean production technology in the regulated region and building production capacity in the unregulated region. The producer determines its production quantities ex post, after emission price uncertainty is resolved. We study two anti‐leakage policies, Border Tax (BT) and Output‐Based Allocation (OB), where the former adopts a “stick” approach that penalizes offshore production and the latter adopts a “carrot” approach that grants free emission allowances for production in the regulated region. First, we show that the emission price uncertainty can exert opposing effects in the absence of an anti‐leakage policy: When the expected emission price is low (high), a higher uncertainty aggravates (mitigates) carbon leakage. Second, through a comprehensive comparison, we highlight that while both BT and OB are able to reduce carbon leakage, BT has a stronger effect in both the regulated and unregulated regions in multiple dimensions, especially when the carbon leakage risk is high. Third, we find that a higher emission price uncertainty weakens the effect of both BT and OB. We therefore suggest that emission price uncertainty should be accounted for when formulating anti‐leakage policies. Finally, we extend our analysis to a competitive case and find that the superiority of BT relative to OB is enhanced.

Carbon footprint impacts of banning cars with internal combustion engines

• Banning new internal combustion engine cars reduce tailpipe CO 2 emissions. • A ban in 2030 is not sufficient for reaching Swedish climate targets for 2030. • An earlier ban year or increased biofuel use is needed to reach targets. • Regulation of carbon footprints for new vehicles and/or batteries may be motivated. • Prospective lifecycle assessment and vehicle fleet turnover simulations are used. Banning sales of passenger cars with internal combustion engines is becoming a common climate change mitigation policy. This study analyzes the effects of such a ban on the carbon footprints of passenger car travel in Sweden using a novel vehicle turnover model and prospective lifecycle assessment, with scenarios for decarbonization of supply chains. A ban on internal combustion engines results in significantly decreased carbon footprints primarily due to reduced tailpipe CO 2 emissions. The full effect of a ban is delayed due to fleet inertia. Increasing the pace of electrification is beneficial for the carbon footprint regardless of global manufacturing decarbonization pathways. A ban in 2030 is not sufficient to reach national policy targets for the transport sector, requiring either an earlier ban (i.e., 2025) or increased biofuel use. Risks of carbon leakage may motivate extending current regulations of vehicle-specific tailpipe emissions to also cover carbon footprints for new cars.

Close the carbon loophole

Close the carbon loophole

Comments: Carbon Tariffs - Fair Incentives for Change?

Carbon credits, carbon taxes, and emissions trading systems are familiar terms in discussions about limiting global warming, the Paris Agreement, and net-zero emissions goals. A more recent addition to the glossary of climate policy is “carbon tariff.” While the concept is not new, it recently surfaced in nascent policymaking in the EU. In 2019, European Commission President Ursula von der Leyen proposed a “carbon border adjustment mechanism (CBAM)” as part of a proposed green deal. In March, the European Parliament adopted a resolution on a World Trade Organization (WTO)-compatible CBAM. A carbon tariff, or the EU’s CBAM, is a tax applied to carbon-intensive imports. Countries that have pledged to be more ambitious in reducing emissions—and in some cases have implemented binding targets—may impose carbon costs on their own businesses. Being eyed now are cross-border or overseas businesses that make products in countries in which no costs are imposed for emissions, resulting in cheaper carbon-intensive goods. Those products are exported to the countries aiming for reduced emissions. The concern lies in the risk of locally made goods becoming unfairly disadvantaged against competitors that are not taking similar steps to deal with climate change. A carbon tariff is being considered to level the playing field: local businesses in countries applying a tariff can better compete as climate policies evolve and are adopted around the world. Complying with WTO rules to ensure fair treatment, the CBAM will be imposed only on high-emitting industries that compete directly with local industries paying a carbon price. In the short term, these are likely to be steel, chemicals, fertilizers, and cement. The Parliament’s statement introduced another term to the glossary of climate policy: carbon leakage. “To raise global climate ambition and prevent ‘carbon leakage,’ the EU must place a carbon price on imports from less climate-ambitious countries.” It refers to the situation that may occur if businesses were to transfer production to other countries with laxer emission constraints to avoid costs related to climate policies. This could lead to an increase in total emissions in the higher-emitting countries. “The resolution underlines that the EU’s increased ambition on climate change must not lead to carbon leakage as global climate efforts will not benefit if EU production is just moved to non-EU countries that have less ambitious emissions rules,” the Parliament said. It also emphasized the tariff “must not be misused to further protectionism.” A member of the environment committee, Yannick Jadot, said, “It is a major political and democratic test for the EU, which must stop being naïve and impose the same carbon price on products, whether they are produced in or outside the EU, to ensure the most polluting sectors also take part in fighting climate change and innovate towards zero carbon. This will give us the best chance of remaining below the 1.5°C warming limit, whilst also pushing our trading partners to be equally ambitious in order to enter the EU market.” The Commission is expected to present a legislative proposal on a CBAM in the second quarter of 2021 as part of the European Green Deal.

Optimal Discounting of Forest Offsets in the Carbon Market

Unilateral actions to reduce CO₂ emissions can be costly and may lead to carbon leakage through relocation of emission-intensive and trade-exposed industries (EITE). This article examines the welfare effects of introducing an emission offset mechanism for the EITE sector, where EITE producers may have to acquire more than one offset credit to balance one emission allowance. The analytical results suggest that it is globally welfare improving for a region to introduce such an offset mechanism, with an optimal conversion rate below 1. Moreover, numerical simulations in the context of the European Union emission trading system and the Reducing Emissions from Deforestation and Forest Degradation) credits support the analytical findings.

Livelihood Impacts of Forest Carbon Protection in the Context of Redd+ in Cross River State, Southeast Nigeria

The rate of landcover change linked to deforestation and forest degradation in tropical environments has continued to surge despite a series of forest governance policy instruments over the years. These informed the launch of one of the most important international policies called Reducing Emission from Deforestation and Forest Degradation Plus (REDD+) to combat forest destruction. REDD+ assumes that communities will have increased assets to natural capital which will enhance their livelihood portfolio and mitigate the effects of climate variability and change across biomes. The aim of this study is to ascertain the livelihoods impacts of forest carbon protection within the context of REDD+ in Cross River State, Nigeria. Six forest communities were chosen across three agroecological zones of the State. Anchored on the Sustainable Livelihood Framework, a set of questionnaires were administered to randomly picked households. The results indicate that more than half of the respondents aligned with financial payment and more natural resources as the perceived benefits of carbon protection. More so, a multinomial logistic regression showed that income was the main factor that influenced respondent’s support for forest carbon protection. Analysis of income trends from the ‘big seven’ non-timber forest resources in the region showed increase in Gnetum africanum, Bushmeat, Irvingia gabonensis, Garcinia kola, while carpolobia spp., Randia and rattan cane revealed declining income since inception of REDD+. The recorded increase in household income was attributed to a ban in logging. It is recommended that the forest communities should be more heavily involved in the subsequent phases of the project implementation to avoid carbon leakages.

Border Carbon Adjustments with Endogenous Assembly Locations

In this study, we develop a two-country model to examine whether border carbon adjustments (BCAs) are more effective than emission tax alone in preventing carbon leakage and decreasing global emissions with endogenous assembly locations. Specifically, we explore three policy regimes: i) emission taxes alone (no BCAs), ii) emission taxes and carbon-content tariffs (partial BCAs), and iii) emission taxes, carbon-content tariffs, and tax rebates on exports (full BCAs). We find that the effectiveness of BCAs depends on whether BCAs induce assembly relocation. If assembly relocation does not occur, BCAs prevent carbon leakage and decrease global emissions. However, if BCAs induce assembly relocation, carbon leakage may occur with partial BCAs, and global emissions may be higher with full BCAs.

Economic under-determination: industrial competitiveness and free allowances in the European carbon market

ABSTRACT Tackling climate change has provided a key focus for the creation of what the editors of this special issue have termed ‘environmental intangibles.’ This paper focuses on the European Union Emissions Trading System (EUETS), a climate policy that revolves around the issuance and trading of environmental intangibles called emissions allowances. Set up in the mid-2000s, the cap and trade system has experienced many complications. We propose here to explore a particularly contentious issue: the allocation of free allowances. We will see that deciding on allocation rules leads to vivid debates about whether energy-intensive industries in Europe, such as the manufacturing of cement, can remain competitive in the global economy if climate policy is unilaterally enforced. These debates are focused on a phenomenon referred to as the risk of carbon leakage due to loss of competitiveness. Drawing on an empirical enquiry into the workings of policy-making, the paper examines the ways, in which this risk is framed and questioned through lobbying and evidential work. We suggest that the threat to competitiveness posed by the EUETS can neither be established, nor dismissed; a form of under-determination is maintained and carbon leakage as a never-quite-tangible possibility becomes a battleground for protecting European industry over the environment.

Impact of Carbon Tax Increase on Product Prices in Japan

The introduction or strengthening of a carbon tax is being considered in many countries as an economic policy instrument to reduce greenhouse gas (GHG) emissions. However, there is no study analyzing the impact of a carbon tax increase in a uniform method for various products, reflecting the energy taxes and exemptions. Therefore, this study analyzes the price changes of products associated with the introduction of a stronger carbon tax, using Japan as an example. A process-based life cycle assessment database was used to enable a detailed product-level analysis. Five scenarios with different taxation amounts and methods were analyzed. The results show that price changes vary greatly by industry sector and product, even within the same industry sector. For example, seasonal vegetables and recycled plastics are less affected by carbon tax increases. Imported products, such as primary aluminum, are not affected by the Japanese carbon tax change, indicating a risk of carbon leakage. If GHGs other than CO2 are also taxed, the price of CH4 and N2O emitting products, such as rice and beef, would rise significantly. The method presented in this paper enables companies to assume price changes in procured products due to carbon taxes and policymakers to analyze the impact of such taxes on products.

Potential carbon leakage under the Paris Agreement

Carbon leakage is the effect of emissions transferring to certain countries due to others having a stricter climate policy. This phenomenon is shown to have undercut the effectiveness of the Kyoto Protocol. Considering the increasingly globalised nature of the world economy, carbon leakage may have an even greater potential under the Paris Agreement some 15 years later. Although a more global approach to combatting climate change, the Paris Agreement is susceptible to leakage because of its lack of policy harmonization and enforcement mechanisms. Here, we perform the first quantitative analysis of the potential for carbon leakage under Paris, using the GTAP-E general equilibrium model of the world economy with energy and carbon emissions to analyse leakage effects under six scenarios. Two of these scenarios analyse regions implementing climate policy in isolation, two greater participation, but still not harmonized, global Paris Agreement policy, and a further two analyse the effect of a US withdrawal from the agreement. Both cases are considered with and without the US withdrawal. Our analysis demonstrates that there is potential for significant carbon leakage effects, in line with the rates produced from studies on the Kyoto Protocol. Depending on model elasticities, we find medium carbon leakage in the range of 1–9% (with a central estimate of 3–4%) under co-ordinated Paris Agreement policy across countries, compared to high leakage of 8–31% when countries operate in isolation. However, scenarios where the USA withdraws from the agreement result in roughly doubling of leakage rates, in the range of 3–16% (central estimate 7%), which demonstrates the vulnerability of the Paris Agreement in its current form. To limit leakage effects, greater policy co-ordination to achieve consistent implicit carbon prices is needed across countries.

Trade in Carbon and Carbon Tariffs

Carbon-based import tariffs are proposed as a policy measure to reduce carbon leakage and increase the global cost-effectiveness of unilateral CO2 emission pricing. We investigate the case for carbon tariffs. For our assessment, we combine multi-region input–output and computable general equilibrium analyses based on data from the World Input–Output Database for the period 2000–2014. The multi-region input–output analysis confirms that carbon embodied in trade has increased during this period, but trade flows from Non-OECD to OECD countries became less important in relative terms since the 2007–2008 financial crisis. The computable general equilibrium analysis suggests that carbon tariffs’ efficacy in combating leakage increases in periods when trade in carbon increases. However, its potential to improve the global-cost effectiveness of unilateral emission pricing remains modest. On the other hand, we find that the potential of carbon tariffs to shift the economic burden of CO2 emission reduction from abating developed regions to non-abating developing regions increases sharply between 2000 and 2007, but declines after the financial crisis.

The salience of carbon leakage for climate action planning: Evidence from the next eleven countries

Territorial-based carbon emissions (TBEs) have been studied extensively. However, investigations of consumption-based carbon emissions (CBEs), adjusted for international trade, have been mainly centered on theoretical arguments. This research is an attempt to address the gap by using CBEs in the case of Next Eleven (N-11) countries. Given that the N-11 are tracking to overtake the G-7 by 2050, successful action to mitigate and adapt to climate change will increasingly need to consider the impact of this fast-emerging group of countries. For empirical analysis, this study employs the cross-sectionally augmented autoregressive distributed lag (CS-ARDL) methodology to examine the long- and short-run impact of imports and exports separately, along with economic growth, industry value addition (IVA), and oil price as control variables using data from 1990 to 2017. The empirical findings reveal that imports enhance, while exports reduce CBEs both in the long- and short-run. Whereas economic growth and IVA intensify CBEs, rising oil prices decrease CBEs both in the long and short-run. The main finding of this study provide evidence of carbon leakage and N-11 countries should diversify their energy mix toward renewable energy and adopt policies related to CBEs that recognize the transfer of emissions (carbon leakage) in trade.