Carbon Leakage Research Articles

Trade flows, carbon leakage, and the EU Emissions Trading System

The EU Emission Trading System (EU ETS) has been shown to have reduced emissions in the participating countries and industries since its adoption in 2005. However, there is less evidence on the shifting of production outside EU to avoid emission controls. We study this so-called carbon leakage with gravity analysis of international trade flows and carbon intensities of trade. We utilize the gravity model on a sectoral level and study its implications empirically. Our findings with new OECD data indicate that some carbon leakage has in fact occurred due to the EU ETS, resulting in higher carbon content of imports to the EU. At the same time, we show that the EU ETS has induced lower carbon content of exports from the EU. In further analysis, we show that the carbon leakage we find has caused a moderate increase in total carbon content embodied in the EU’s trade, despite the decreases in exported carbon.

Revisiting Copenhagen climate mitigation targets

Many economies set climate mitigation targets for 2020 at the 2009 15th Conference of the Parties conference of the United Nations Framework Convention on Climate Change in Copenhagen. Yet no retrospective review of the implementation and actual mitigation associated with these targets has materialized. Here we track the national CO2 emissions from both territory and consumption (trade adjusted) perspectives to assess socioeconomic factors affecting changes in emissions. Among the 34 countries analysed, 12 failed to meet their targets (among them Portugal, Spain and Japan) and 7 achieved the target for territorial emissions, albeit with carbon leakage through international trade to meet domestic demand while increasing emissions in other countries. Key factors in meeting targets were intensity reduction of energy and the improvement of the energy mix. However, many countries efforts fell short of their latest nationally determined contributions. Timely tracking and review of mitigation efforts are critical for meeting the Paris Agreement targets.

Beggar-thy-neighbor: Carbon leakage within China's pilot emissions trading schemes

The differences in the market liquidity of eight pilot emissions trading schemes (ETS) and the economic development of cities within the provincial-level ETS raise carbon leakage risks among the pilot cities. Utilizing panel data and DID models for 266 prefecture-level cities in China from 2006 to 2019, the empirical analysis reveals several key findings. Firstly, at the provincial level, the Tianjin pilot is found to have significantly increased CO2 emissions, potentially linked to carbon spillover from Beijing. Additionally, at the prefecture-level city level, certain cities in Guangdong Province and Fujian Province exhibit significant increases in CO2 emissions, indicating carbon transfer within the pilot ETSs. Secondly, all three spatial spillover effect tests demonstrate a notable carbon spillover effect between pilot cities. Lastly, the analysis of the moderating effect suggests that administrative intervention within the ETS and market mechanisms have limited impact on carbon spillover between pilot cities, while administrative intervention outside the ETS significantly enhances carbon leakage between pilot cities, primarily driven by carbon transfer resulting from state-owned enterprises' support for government emission reduction actions.

Climate true‐cost analysis of industrial goods and its regulatory implications on value chains and global competition

AbstractClimate change and its damaging consequences for ecology and humanity is advancing. Industry and its metals sector are responsible for most greenhouse gas emissions. Current costs of industrial goods do not reflect the true costs caused by the externalized climate damages of its production and thus offer no competitive incentive to decarbonize. Additionally, regional climate regulation can lead to competitive distortion. We therefore aim to investigate the impact of climate cost internalization on the metals industry. Using true‐cost analysis for an exemplary and widely used metal product, the effects of climate true costs depending on production region, technology, and energy mix, CO2e taxation and value chain are examined. Based hereon, the impact of internalizing climate true costs together with the introduction of a carbon‐border tax on the carbon leakage problem, climate protection, and the cost situation for companies in global competition are investigated. The results of the study show that steel and wire production is responsible for most CO2e emissions showing significant decarbonization effects by steel recycling whereas production location and logistics play a minor role. On a competitive level, cost internalization has hardly any effect on the product costs because of the currently low CO2e‐taxation rates. Thus, almost no incentive to produce or consume in a climate‐protective way is generated, incentivizing production in pollution havens versus highly climate regulated regions. Instead, to realize emission efficiency gains and innovations leading to a competitive advantage of decarbonized products and value chains, a significant increase of CO2e‐taxation rates together with a carbon‐border tax is necessary.

The Impact of Regulation on Environmental Performance: an Analysis for European Countries

This study provides new evidence on factors driving firms´ eco innovation in the European Union, based on the data of the Community Innovation Survey for the years 2008 and 2014 for eleven European countries. First, our findings reveal that the propensity to eco-innovate changes over time. Second, the propensity to eco-innovate is unequally distributed across sectors, given that it is concentrated in a few sectors. Third, we find that sectoral behavior is strongly influenced by the taxonomy of green sectors introduced by the European Union, since the propensity to innovate is higher in the carbon leakage taxonomy than in the mitigation and adaptation taxonomy. These results provide further insights into the sectoral factors driving eco-innovation diffusion. Moreover, these findings are relevant to increase environmental stringency, as they contribute to the diffusion of eco-innovation across sectors, especially in those that do not innovate.
 

Production- and consumption-based emissions in carbon exporters and importers: A large panel data analysis for the EKC hypothesis

The Environmental Kuznets Curve (EKC) hypothesis has become a widely used framework for the investigation of the income-environment nexus. However, the literature in this field is biased toward the reliance on production-based carbon dioxide (CO2) emissions (PBE) as a proxy for environmental degradation. This production perspective ignores the carbon emissions embedded in trade, which are estimated to make up approximately a quarter of total global emissions. Therefore, the carbon leakage issue makes consumption-based CO2 emissions (CBE) accounting vital for better understanding the relationship between income and carbon emissions. In this study, we comparatively investigate the EKC pattern based on both PBE and CBE for a sample of 85 countries over the period between 1990 and 2020. In doing so, we investigate whether different emission accounting methods have an impact on the EKC pattern and examine how this impact differs depending on whether the countries are net importers or exporters of emissions embedded in trade. To this end, we first endogenously classify countries based on the club convergence approach proposed by Phillips & Sul [1] and obtain country groups such as those that are net exporters or importers of CO2 emissions. Using the system generalized method of moments (SGMM) estimator, we test the validity of the EKC hypothesis in the second step and identify the main driving forces behind the changes in PBE and CBE for each convergent club by controlling the effect of trade and urbanization. Therefore, for the first time, we compare the EKC hypothesis based on both PBE and CBE for a large sample of countries that are endogenously divided into different groups, and investigate the potential impact of alternative emission accounting approaches and the status of being net exporters or importers of CO2 emissions on the EKC pattern. The findings support the different patterns for PBE and CBE: while the EKC hypothesis is supported for both PBE and CBE for countries that are net importers of emissions, neither PBE nor CBE show an inverted U-shaped relationship with income for countries that are net exporters of emissions. These results strongly support the need for coordination in policies to reduce CO2 emissions between importers and exporters of hydrocarbons and energy-intensive goods.

Peatland restoration in Germany: A dynamic general equilibrium analysis

Drained peatland currently contributes 7.5% of Germany's total national greenhouse gas emissions. The National Peatland Protection Strategy adopted by the German government in 2022 recognizes that these emissions need to be reduced significantly to meet the country's climate change mitigation commitments. The present study employs a global dynamic computable general equilibrium model to assess the economic and greenhouse gas emission impacts of alternative agriculture-focused peatland rewetting scenarios for Germany up to 2030. In contrast to partial-analytic approaches, the global general equilibrium approach allows to take consistent account of economic ripple-on effects and carbon leakage effects triggered by peatland rewetting. The results suggest that in the medium term towards 2030 a reduction in annual emissions from agricultural peatland use by up to 45% are attainable at marginal private abatement costs between 27 and 61 Euro/tCO2e. Carbon leakage effects due to induced indirect land use change in Germany and the rest of the European Union reduce the global net emission reduction impact by 0.7 to 1.0% of the direct emission reduction. The effects on food prices remain small in all scenarios. In conclusion, a sizable reduction of Germany's land-use-related emissions is achievable at a low macroeconomic cost by moving beyond the moderate ambitions of the National Peatland Restoration Strategy.

Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?

Carbon pricing has proven to be effective in reducing regional carbon emissions, but it has also resulted in carbon leakage, one way to handle this is a carbon tariff, but controversial. This study examines the role of carbon tariffs in mitigating carbon leakage. It proposes various carbon tariff schemes that take into account both direct and embedded carbon emissions. The research findings demonstrate that carbon tariffs focusing solely on direct emissions are insufficient in curbing carbon leakage. This is because such strategies tend to impose high tariffs on energy-intensive industries, leading to increased imports of indirect‑carbon-intensive products and exacerbating carbon leakage. Therefore, it is crucial to consider embedded carbon emissions when designing carbon tariff policies. This study provides a comprehensive analysis of the implications of different carbon tariff schemes on various industries and commodities. It advocates for the implementation of carbon tariff schemes that specifically target products with high embedded carbon emissions, thereby further reducing carbon leakage. In summary, this study identifies two key factors for mitigating carbon leakage: addressing embedded carbon emissions alongside direct emissions, and taking into account the opportunity cost associated with carbon emissions resulting from unit consumption within the carbon pricing region.

Climate Change Mitigation in Agriculture beyond 2030: Options for Carbon Pricing and Carbon Border Adjustment Mechanisms

SummaryIn the EU's climate policy, agriculture is covered as an Effort‐Sharing (ESR) sector, i.e. a sector beyond the Emission Trading System and LULUCF. Despite ambitious climate targets for the ESR sectors and an emerging focus on the need for agriculture to make a substantial contribution to climate change mitigation, agriculture has contributed much less to achieving climate targets than other ESR sectors in most EU Member States. A more radical mitigation instrument is required since the potential to increase climate efficiency in EU agriculture is limited. Carbon pricing is considered an effective instrument and is widely adopted in other sectors worldwide. Options on how to reduce related carbon leakage are discussed. Our recommendations for efficient climate change mitigation policy in agriculture are threefold. First, the agricultural sector needs more precise guidance and clear climate targets. Second, although preventing all conflicts between climate change mitigation actions and other policy goals is impossible and inefficient, a policy could minimise adverse effects. Third, since agricultural GHG emissions can only be minimised and compensated by negative emissions in other sectors, well‐defined intersectoral coordination is required.

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.

The economics of carbon leakage mitigation policies

In a trade model with endogenous emissions abatement, we investigate the impact of three policy instruments aimed at mitigating carbon leakage: free emission allowances, a Carbon Border Adjustment Mechanism (CBAM), and a CBAM with export rebates. We show that providing free allowances does not alter the incentives to abate carbon emissions, but, instead fosters the entry of more carbon intensive producers. This “levels the playing field” both domestically and internationally, and may even reverse carbon leakage. In contrast, a CBAM only levels the playing field domestically, and may lead to an autarky equilibrium. To reverse carbon leakage, a CBAM must be complemented with export rebates. We further show that a CBAM and export rebates improve welfare for any carbon price, and we identify the optimal share of free allowances with or without a CBAM. Finally, we perform a calibration exercise on cement and steel sectors to simulate the effects of the CBAM recently adopted by the European Union. Our model predicts a scenario with reverse carbon leakage and significant welfare gains for both sectors.

Economic, environmental, and technical gains from the Kyoto Protocol: Evidence from cement manufacturing

The Kyoto Protocol is an international agreement signed in 1997 to reduce emissions of carbon dioxide and mitigate the consequences of global climate change. Early studies of the effectiveness of the Kyoto Protocol have attributed it to approximately a 7%–10% reduction in global carbon dioxide emissions. Given the carbon intensity of cement manufacturing, we examine the impact of the Kyoto Protocol on cement manufacturing output and carbon dioxide emissions. We are especially concerned about whether the Kyoto Protocol may have led cement manufacturing to move to places without binding emissions targets, thus resulting in carbon leakage. We find that nations with binding emissions targets under the Kyoto Protocol saw a 5% reduction in both cement manufacturing and carbon dioxide emissions from cement manufacturing compared to other nations, suggesting that the Kyoto Protocol may have led to technological innovation in cement manufacturing. Using data on carbon intensities for cement manufacturing, we support this notion and find further evidence that it fostered diffusion of existing, cleaner technologies from relatively more developed nations during the first phase, and technical innovation by these nations during the second phase, resulting in significant reductions in carbon dioxide emissions.

How Does Carbon Trading Impact China’s Forest Carbon Sequestration Potential and Carbon Leakage?

This paper presents an in-depth analysis of the impact of forest carbon sink trading in China, examining its effects from 2018 to 2030 under various carbon pricing scenarios. Using the Global Timber Market Model (GFPM) along with the IPCC Carbon Sink Model, we simulate the potential shifts in China’s forest resources and the global timber market. The study finds that forest carbon trading markedly boosts China’s forest stock and carbon sequestration, aligning with its dual carbon objectives. China’s implementation of forest carbon trading is likely to result in a degree of carbon leakage on a global scale. During the forecast period, our study reveals that the carbon leakage rates under three different forest carbon trading price scenarios, which at estimated at 81.5% (USD 9.8/ton), 64.0% (USD 25/ton), and 57.8% (USD 54/ton), respectively. Notably, the leakage rate diminishes as the forest carbon sink price increases. Furthermore, analysis also suggests that regional variations in the average carbon sequestration capacity of forests, alongside the structure of China’s timber imports, emerge as significant factors influencing the extent of carbon leakage.

A computable general equilibrium analysis of the EU CBAM for the Japanese economy

The EU plans to introduce a carbon border adjustment mechanism (CBAM) to curb carbon leakage and to protect energy-intensive and trade-exposed (EITE) industries. This move by the EU to introduce CBAMs has raised concerns in Japan that it will harm Japanese industry and the Japanese economy. To address these concerns, this study tries to provide an ex ante and quantitative analysis of the economic and environmental effects of the introduction of the EU CBAM. To capture the effects of the EU CBAM, this study employs a global multiregional, multisector computable general equilibrium model with 18 sectors and 17 regions. The main insights obtained from the analysis are as follows. First, we find that the introduction of the EU CBAM significantly reduces carbon leakage from the EU. Second, the effects of the introduction of CBAMs on the GDP and welfare of each country vary from country to country, but the effects are generally very small. While there is a positive impact on GDP and welfare in Japan, the magnitude of the impact is very small. There will also be a negative impact on Japan’s EITE industries, but the magnitude of this impact is very small and not of great concern.

Carbon Leakage and International Climate Change Law

AbstractCarbon leakage – the increase of greenhouse gas emissions in foreign jurisdictions following the introduction of domestic or regional climate mitigation measures – raises key questions in the climate change debate. This includes whether carbon leakage constitutes a threat to the environmental integrity of climate policies and, if so, how this could be mitigated. Through the use of four hypothetical models of international climate change regime, this article argues that international climate change law is a key factor in answering this two-part question. Firstly, the article demonstrates that the architecture of international climate change law affects whether carbon leakage can be considered as undermining the mitigation objective of climate policies. Secondly, it draws attention to the interaction – and potential tension – between carbon leakage prevention measures and international climate change law.

Выбросы парниковых газов по потреблению: от расчетов к политическим решениям

In national carbon emissions reduction targets as well as within the international climate change regime, production-based (or territorial) emissions are taken into account. Such accounting imposes the major responsibility for emissions on leading emerging economies where most of the carbon-intensive industries are allocated. It also provokes carbon leakage: stringent climate policies in one jurisdiction may lead to the reallocation of production and corresponding emissions to others where companies bear lower regulation costs. Consequently, asymmetry occurs. While most developed countries gradually reduce their emissions, they are simultaneously growing in emerging economies, with no significant progress in the mitigation of global climate change. This paper directs attention to an alternative way of emissions accounting – based on consumption. In this regard, emissions are attributed to the particular economy if they are embodied in goods consumed there regardless of where exactly these emissions are generated. This type of accounting supposes that emissions of major emerging economies are not their own choice but also the reflection of the international division of labour and the result of demand for carbon-intensive goods coming from major centres of consumption in developed countries. Regular calculation and disclosure of consumption-based emissions (along with production-based ones) and their gradual integration into the process of emissions reduction targetsetting would provide a new perspective on sharing responsibility for emissions, prevent carbon leakage and clearly demonstrate the need for international climate cooperation between exporters and importers of carbon-intensive goods, expand the scope of emissions under regulation, and give opportunities to countries to use the wider range of decarbonization tools. The latter would include those that involve the population in mitigation efforts and better link the price for carbon with the level of household consumption, which is important for coping with carbon inequality and promoting climate justice.

Emission trading schemes and cross-border mergers and acquisitions

The Emission Trading Scheme (ETS) provides a market mechanism to mitigate carbon emissions and has been introduced in many countries. Its fundamental idea is to make carbon emissions costly. Consequently, firms undertaking cross-border expansions may have to consider this extra cost when entering markets with an ETS. They may avoid these countries or relocate their investment to countries without an ETS. Using a large sample of international firms between 2002 and 2019, we investigate this issue via a difference-in-difference approach. Our results show that ETS implementation leads to significantly less cross-border merger and acquisition (M&A) deals in the host countries, indicating an avoidance effect or potential carbon leakage. Further analysis reveals that ETS implementation decreases firms’ financial performance and increases market risks, both contributing to cross-border M&A decisions. We demonstrate strong evidence of cross-sectoral differences, where carbon-intensive sectors tend to bear higher costs. This study contributes to the environmental economics and finance literature and provides evidence with policy relevance.

Spatiotemporal patterns of net regional productivity and its causes throughout Ordos, China.

A comprehensive understanding of the terrestrial carbon sink is essential for proficient regional carbon management. However, previous studies predominantly relied on net ecosystem productivity (NEP) as an indicator of regional carbon sink, overlooking the impacts of carbon emissions from physical processes and carbon leakage associated with anthropogenic activities. In this study, net region productivity (NRP), a vital metric representing carbon sink dynamics in regional multi-landscape ecosystems, was employed to systematically analyze the patterns, trends, and causes of carbon sink in Ordos. The results revealed that spatially averaged NRP in Ordos was 70.334 g·m-2·a-1, indicating a carbon sink effect. The coefficient of variation of NRP was 68.035%, with a higher NRP in the southern region. Normalized difference vegetation index (NDVI) predominantly controlled the spatial heterogeneity of NRP in Ordos, while precipitation emerged as the primary climatic factor influencing spatial differences in NRP. Regional variations in the impact of environmental factors on NRP were evident. In most areas, NRP showed a notable increasing trend influenced by various factors. Specifically, the simultaneous rise in NDVI and improvements in hydrothermal conditions contributed to the gradual elevation of NRP, each with varying degrees of influence across Ordos and its sub-regions.

The impact of the EU's Carbon Border Adjustment Mechanism on the global iron and steel trade and emission reduction.

The European Council completed the legislative procedure to establish the Carbon Border Adjustment Mechanism (CBAM) on April 25, 2023, which will be launched in 2027. The iron and steel sector is the main target of the forthcoming CBAM due to the industry's energy-intensive consumption with high carbon dioxide (CO2) emissions. However, minimal existing research has been conducted in this regard. This study employs GTAP-e 11.0 and TOPSIS models to estimate the effects of CBAM implementation on the major nations around the world from 2027 to 2030, examining countries' GDP, social welfare, iron and steel production, trade balance, and CO2 emissions to the global environment. This study concludes: (1) The GDP and social welfare of important iron and steel trade partners throughout the world will be significantly impacted by the application of CBAM. Most nations, including those in the EU, will experience negative GDP effects, with China undergoing the most pronounced social welfare declines followed by India. In contrast, the EU27 will benefit the most in terms of social welfare, followed by the US, Japan, and Russia. (2) Iron and steel production will decrease in all countries outside the EU, but it will have a positive impact on the trade balance of most countries. (3) The CO2 emissions of all countries except for the EU and Japan will decrease, with a positive impact on preventing carbon leakage in the international iron and steel trade. (4) Comprehensive analysis demonstrates that the EU will benefit the most, and China will suffer the most from CBAM application. Based on the above conclusions, this study proposes corresponding policy recommendations.

Implications of the Carbon Border Adjustment Mechanism on South Korean industries: Challenges and policy recommendations

This study examines the effects of the European Union's Carbon Border Adjustment Mechanism (CBAM) on South Korean industries. Concerns about carbon leakage, where carbon emissions increase in countries or regions with less stringent climate policies, have grown recently. Specifically, firms strategically relocate their operations to countries with lower carbon costs, where they can produce goods more cheaply and without carbon constraints. CBAM is a carbon tariff on carbon intensive products imported by the European Union. While the CBAM has the potential to reduce global carbon emissions, it poses significant risks to South Korea, which relies heavily on exports of CBAM-affected products. This study provides an overview of the potential effects of the CBAM on industries in South Korea, applies event study analysis to quantitatively evaluate how the financial market has reacted to CBAM-related events. Based on the research findings, as the details of CBAM become clearer, there is a shift in perception from environmental goals to broader issues across industries. Building on this understanding, we discuss issues related to the CBAM enactment: firm-level carbon accounting, EC-certified accreditation institutions, and the carbon allowance price gap between the EU and South Korea. We propose necessary short-term and long-term policies to attenuate CBAM-related risks.