Carbon Leakage Research Articles

Legitimacy or efficiency? Carbon emissions transfers under the pressure of environmental law enforcement

Reducing the carbon footprint of companies will be essential if we are to stabilise climate change. However, many researchers are concerned that companies will simply transfer their carbon emissions to another party resulting in carbon leakage rather than emissions reduction. Thus, there is a need to thoroughly investigate what drives companies to transfer carbon emissions as opposed to reducing them. In this study, we explore the motivations and internal mechanisms behind a company's decision to opt for carbon transfers instead of carbon reduction. Drawing on legitimacy theory with a US sample, we provide evidence that strict environmental laws are an external motivation that place pressure on companies to transfer their carbon emissions. Using overseas capital and declared emissions reductions as a proxy for carbon emissions transfer, we find a significant positive correlation to environmental law enforcement. In addition, when facing the force of environmental law, the carbon strategies companies choose are influenced by a felt pressure to operate with both legitimacy and efficiency. Moreover, as pressure mounts in either of these spheres, companies become more and more likely to opt for emissions transfer not emissions reduction. The results indicate that strict environmental regulations forces companies to transfer carbon emissions, which is exacerbated if companies have a high legitimacy and efficiency pressure. As such, this study provides an in-depth discussion on corporate responses to carbon emissions with valuable implications for carbon emissions policymakers.

Tax policies to reduce carbon emissions

AbstractCarbon taxes or similar pricing instruments could play a crucial role in helping countries decarbonise their economies. No country has a single carbon price that applies to all greenhouse gas emissions. The UK is typical in having adopted a complex patchwork of policies that raise the cost of different polluting activities to different degrees, resulting in implied carbon taxes that vary greatly across sources of emissions. We document and quantify these inconsistencies in the case of the UK, and assess the case for greater uniformity after accounting for considerations of efficiency, distribution, carbon leakage and the use of alternative policy instruments. We argue for greater rationalisation of environmental taxes in the UK and other developed economies.

GHG emissions, trade balance, and carbon leakage: Insights from modeling thirty-one European decarbonization pathways towards 2050

Recognizing the urgent need for concrete sectoral information in designing European climate change mitigation pathways of policy relevance, this study formulates, simulates and compares 31 European decarbonization pathways, focusing on changes in trade flows and GHG emissions. This paper exploits the rich sectoral details from a large bottom-up built system dynamics energy model (the European Calculator model), soft-linking it to a tailor-made computable general equilibrium model (GTAP-EUCalc). Our modeling results suggest that increasing decarbonization ambitions leads to higher reductions of greenhouse gas emissions in Europe (EU27 plus the UK and Switzerland), but with the undesirable outcome of decreasing its external competitiveness through worsened trade balance, if the rest of the world does not reciprocate Europe's decarbonization ambition. A comparison of results across pathways with varying ambition levels between demand and supply measures further reveals their differential roles: when keeping demand-side ambitions constant, elevating efforts on the supply side leads to larger emission reductions and bigger decrease in trade balance; however, holding supply-side ambitions unchanged and increasing demand-side efforts improves the trade balance while achieving larger emission reductions. Furthermore, ambitious demand measures avoid more losses of net exports when coupled with more ambitious supply mitigation measures. These results point to the need for coordinated demand and supply climate change mitigation actions across sectors, and to the benefits of climate-friendly lifestyle choices in not only reducing emissions but also in avoiding undesirable trade outcomes. Our results also demonstrate positive associations between increasing reductions in GHG emissions, worsening external trade balance, and rising carbon leakage rate for Europe. To safeguard the global effectiveness of European decarbonization actions, global cooperation under the Paris Agreement is needed so as to avoid the application of unilateral trade policy such as border carbon adjustments.

Know your opponent: Which countries might fight the European carbon border adjustment mechanism?

The European Union (EU) plans to activate a carbon border adjustment mechanism (CBAM) in January 2023. This is meant to secure fair competition for European energy-intensive industries, incentivize countries both inside and outside the EU to cut emissions, and hinder carbon leakage from the EU. Early reactions from some large economies suggest that CBAM will encounter significant international opposition, especially from countries whose industry is dependent on fossil fuels. The purpose of this paper is to identify which countries are likely to resist CBAM most fiercely. This is done by creating a multidimensional CBAM Opposition Index based on the following indicators: trade with the EU, carbon intensity, litigiousness in the World Trade Organization (WTO), domestic public opinion on climate change, and capacity for innovation. The analysis indicates that the following countries are most likely to mount opposition to CBAM: Iran, Ukraine, the USA, the United Arab Emirates, Egypt, China, India, Kazakhstan, Russia, and Belarus. How the EU handles opposition from these countries will be decisive for the fate of CBAM. The index can serve as a tool for policymakers inside and outside the EU who need to negotiate over CBAM and want to anticipate the stances of other countries and understand their drivers.

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.

Dairy Trade Helps to Alleviate Global Carbon Emission Pressure.

Global dairy production, consumption, and trade are growing rapidly, driven by population and per capita income growth and increasing health concerns mainly from developing countries, which has aroused concerns about the related carbon emission (mostly in the form of methane) increase. If all of the dairy products consumed were produced locally/domestically in the developing countries/economies (a counterfactual scenario), the carbon emissions in 2018 would be 28 Mt CO2-equiv higher than its status quo (a factual scenario). The present study indicates that unlike in many global trade cases in which carbon leakages are from developed to developing countries, global dairy trade is characterized by net embodied carbon flows from developed to developing countries/economies due to the fact that there is an overwhelming one-way-flow of dairy products from developed to developing countries/economies. The differences in the carbon emission factors between the developed and developing countries/economies provide an opportunity that global dairy trade and production specialization can help to reduce carbon emissions from increasing dairy product demand, and the total reduction potential is estimated to be about 414 Mt CO2-equiv from 2018 to 2030. Free trade agreements such as the Regional Comprehensive Economic Partnership will incentivize larger carbon emission reduction benefits through promoting dairy trade.

Extra‐regional trade and consumption‐based carbon dioxide emissions in the European countries: Is there a carbon leakage?

AbstractThe European countries are committed to making Europe the first carbon‐neutral continent by 2050 under the carbon leakage debates. Carbon leakage occurs when carbon‐intensive production relocates to environmentally unregulated countries. The trade channel of carbon leakage refers that the carbon‐loaded products finally come back through imports and increase consumption‐based carbon emissions in the decarbonization‐committed countries. This study probes the effects of extra‐imports (imports from non‐European countries) share on per capita consumption‐based carbon dioxide emissions (CCEpc) in the panel of 31 European countries from 1995 to 2018. After identifying cross‐country dependence, unit root, heterogeneity, and cointegration, the study applies the common correlated effects mean group (CCEMG) and augmented mean group (AMG) estimators, followed by the Emirmahmutoglu‐Kose causality test. The results reveal a carbon leakage pattern that extra‐imports share has both associative (positive) and causal (one‐way) effects on CCEpc. Other results unveil a strong decarbonization contribution from enhancing renewable energy supply against the carbonization forces of growing extra‐exports (exports to non‐European countries) share, real gross domestic product, and comparative advantage in high‐tech manufactures, while population density's influence is statistically insignificant. Some policy implications including carbon‐adjusting border taxes on trade are drawn for regional and global mitigation undertakings.

The impact of carbon leakage controlling mechanisms on international trade: A review

Proposition of Carbon Border Adjustment Mechanism Since the "Kyoto Protocol" came into effect, developed countries have adopted strict policies to control the emission of greenhouse gases, and the topic of carbon leakage mechanism has attracted the attention of scholars. This article reviews the major academic works published in the past decade on carbon leakage and its control mechanisms. The works are categorized into "carbon leakage", "carbon leakage controlling mechanism" and "impacts on international trades" according to their research focuses. Clear patterns regarding transitions of their research focus and methodologies have emerged during the review process. This article revealed that during the past decade the perspective of relevant research has altered from unilateral (domestic) point of view to the multilateral view, the focus has moved from the developed world (the EU in particular) to the developing world (like China and India), and the research method has incorporated more and more quantitative models to gain insights from multi-dimensional data. Despite that this work is neither exhaustive nor vital for unsettling matters of climate bargaining, the review shed light on what can be borrowed, what can be avoided and what requires more trial-and-error attempts to modify and adapt mature climate mechanisms for developing economies like China.

Between sovereignty and complexity: the settlement of tax disputes by the world trade organization

ABSTRACT The analysis of WTO law and the key disputes in ‘trade and tax’ field leads to interesting findings. The relationship between international trade law and domestic tax laws is not easy. First, the emerging picture is the difficulty of the trade regulatory framework and the jurisprudence to draw a clear line between what is permitted and what is not. Legal uncertainty is the word. This uncertainty has its root in the complexity of both domestic tax laws and the legal standards of trade law. Secondly, trade law often significantly impacts on governments’ sovereignty. In a globalized world, this is inevitable. Thirdly, there is an evolution in how trade has had to deal with taxation. The focus has shifted from the traditional cases of favouritism, discrimination and protectionism to more difficult issues connected to key challenges of our times – tax avoidance, level playing field, competitiveness, carbon leakage, the digitization of the economy. More recently, even national security has added to the mix. This complexity in the ‘trade and tax’ relationship raises fundamental questions about the limited role trade law can play in solving taxation issues. The article claims that trade law can only offer partial solutions to key tax issues. By nature, trade law is more suited to regulate specific instances where tax is used as a tool of protection rather than systemic problems arising from the differences in domestic taxation and the lack of established rules to regulate new phenomena like digital services, for which multilateral tax treaties are the first-best.

The potential impacts of an EU-wide agricultural mitigation target on the Irish agriculture sector

ABSTRACT The Irish Climate Action Plan published in 2019 outlines the significant role that agriculture will have to take to achieve a national reduction in greenhouse gas emissions in Ireland. Recent growth in the agricultural sector, especially of the bovine population, however, has led to a continuous increase of agricultural greenhouse gas emissions. For the agricultural sector to meet its potential, greenhouse gas emission targets could be challenging. The agricultural sector model CAPRI is used to investigate the impact of a 20 per cent EU-wide agricultural greenhouse gas mitigation target on the Irish agriculture sector. Three scenarios, allowing the endogenous implementation of mitigation technologies, show the possible impact range of such a policy target. The research indicates that the Irish agriculture sector can achieve the set mitigation target by adapting livestock production systems, resulting in agricultural efficiency gains, and by implementing specific mitigation technologies. Without a mandatory mitigation target but with subsidies granted, changes in the level of agricultural greenhouse gas emissions are marginal, and voluntary adoption is limited. Subsidising the implementation of mitigation technologies can buffer the impact that a mitigation target will have on the agriculture sector in Ireland while achieving the set greenhouse gas emissions reduction. Total agricultural income increases if a mandatory target is set due to strong structural changes. As the analysis shows, the emission reduction is partly achieved through a reduction in total production and strong competitors outside of the EU appear to fill the occurring supply gap. This could potentially lead to a carbon leakage effect with production and emissions shifting towards strong ruminant-based producing countries.

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.

North–South asymmetry, unilateral environmental policy and carbon tariffs

AbstractThis paper focuses on the potential impact of a carbon tariff on carbon emissions, North–South trade and welfare. We use a North–South trade model, where North implements a unilateral environmental policy on domestic carbon‐intensive industries followed by a carbon tariff on imports from South. Unlike the existing studies, we allow asymmetry in clean production technologies and marginal environmental damage. We show that a carbon tariff can reduce the global carbon emission via the use of a more advanced clean production technology in North, which increases the firm profit and welfare. However, improvement in welfare of North is associated with a decrease in global trade flows and welfare of South. We find that, in the presence of asymmetry in clean production technologies between North and South, a carbon tariff introduced by the North can eliminate carbon leakage, but the exports of South decrease below the pre‐unilateral environmental policy level and hence North can potentially use a carbon tariff for trade protectionism in the name of reducing carbon leakage in South.

The European Union's CBAM as a de facto Climate Club: The Governance Challenges

The European Commission has announced far-reaching reforms to accelerate the reduction of greenhouse gas emissions. Among the proposals constituting the European Green Deal is the adoption of a Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage. In practice, however, CBAM will not only act as a shield for the European Emissions Trading System (ETS) but also incentivize other countries to implement compatible carbon pricing schemes. We argue that the EU's CBAM thus de facto has the features of a climate club, but the current proposals and debate do not address how the club would be governed. While the literature focuses on legal and economic aspects of CBAM design, there is little debate about the governance challenges it entails. We identify two major challenges. CBAM will put pressure on trade partners to introduce carbon pricing and/or bring it into line with the price of EU ETS allowances. However, the future availability and thus price of ETS allowances is determined within the EU. Secondly, the method for calculating embedded carbon is left to the discretion of the European Commission. EU policymakers need to acknowledge the challenges that follow from setting up a de facto climate club, and that addressing them involves a trade-off between maintaining control over the direction and ambition of climate policy and CBAM's legitimacy.

Carbon transfer under China's inter-provincial trade: Evaluation and driving factors

China's emission reduction task under the carbon peaking and neutrality goals is particularly arduous. Due to the uneven economic development among regions, the extent of carbon transfer and “carbon leakage” varies across China's provinces. Based on China's latest multi-regional input-output tables and the panel STIRPAT model, this study evaluates the carbon footprint and driving factors of carbon transfers. The results show that from 2012 to 2017, despite carbon emissions increased, the carbon intensity of most provinces and cities has been decreasing year by year. There are significant differences in production and consumption sides and their emission structures in different regions, with domestic demand emissions being the major contributor to carbon emissions on both production and consumption sides. Also, “carbon leakage” from abroad to China is decreasing. Furthermore, we have analyzed the various effects of driving factors, and proposed recommendations to motivate carbon peaking and carbon neutrality in the following aspects: regional carbon reduction, responsibility for the carbon reduction, carbon reduction in industries, and the role of the carbon trading market.

Blockchain solutions for carbon markets are nearing maturity

Blockchain solutions for carbon markets are nearing maturity

Carbon Border Measures, Environmental Effectiveness and WTO Law Compatibility: Is There a Way Forward for the Steel and Aluminium Climate Club?

AbstractWith its narrow focus on price-based policies and ‘explicit’ carbon prices, the EU carbon border adjustment mechanism (CBAM) aims to prevent carbon leakage by ensuring that imported products ‘bear’ the same exact economic costs ‘borne’ by EU products. The proposed US border carbon adjustment (BCA) and the recent proposal for a global steel and aluminium arrangement (GSAA), by contrast, reflect a broader focus on environmental equivalence and recourse to punitive or quasi-punitive remedies. All recently proposed carbon border measures suffer from specific limitations. Further, albeit to a different extent, they are all associated with problematic aspects in terms of WTO law compatibility. This research note enquires whether the GSAA could be fine-tuned at the regulatory design stage in such a way as to provide an environmentally effective and WTO law compatible way forward. The analysis illustrates that recourse to an installation-based approach, emission limit values and product standards would achieve these goals. Nonetheless, the implementation of this ambitious strategy would be fraught with political obstacles.

Spatiotemporal Variation and Driving Factors of Embodied Carbon in China-G7 Trade

China and G7 countries contribute 70% global GDP and 55% global carbon emissions. The carbon leakage between China and G7 is a crucial issue in achieving the synergetic emission abatement globally. The motivation of this study is to evaluate the embodied carbon transfer between China and G7 in the trade between 2000 and 2014, and investigate the driving factors that impact the embodied carbon trend. A multiregional input–output (MRIO) model based on the WIOD database is constructed, and a structural decomposition analysis (SDA) is employed. The results indicate that China plays the role of net exporter of embodied carbon in trade with G7, which mainly flows to the US (5825.67 Mt), Japan (3170.36 Mt) and Germany (1409.93 Mt). However, China’s embodied carbon exports to the G7 show an inverted U-shaped trend with a turning point after financial crisis, while the G7’s embodied carbon exports to China continue to rise. The conclusion is that to achieve the climate goal of carbon neutrality, it is not enough to rely solely on the low-carbon transition on the production side, the demand side should also be adjusted.

Can market segmentation lead to green paradox? Evidence from China

China has announced its commitment to peak carbon emissions before 2030 and reach carbon neutrality by 2060. However, market segmentation may hinder these achievements because it creates carbon leakage among provinces. This study empirically examines the impact of market segmentation on the effectiveness of environmental regulations based on a dynamic spatial panel approach using data for 30 Chinese provinces from 2004 to 2018. Our results showed that pure environmental regulation can significantly curb carbon emissions; however, under the influence of market segmentation, carbon emissions reduced in the region are released into the neighboring provinces through the carbon leakage pathway, while the total carbon emissions raised, leading to the “green paradox”. The study also showed that the “green paradox” effect of market segmentation is more pronounced for provinces with a higher share of secondary industries, suggesting industrial transfer as the primary pathway of carbon leakage between provinces in China. Therefore, to effectively avoid the green paradox phenomenon, it is necessary to continuously promote market unification, optimize the industrial structure, and establish a unified carbon reduction system. This study clarified the relationship between market segmentation and the green paradox, thereby providing insights for China to achieve its carbon emission reduction and carbon neutrality goals.

The trade-off between the economic and environmental footprints of multinationals’ foreign affiliates

The side effects of the production activities of multinational enterprises (MNEs) are a constant source of controversy. It is claimed that MNEs stimulate employment and technological progress in the countries where they operate, but they are simultaneously accused of intensifying inequality and environmental damages, especially in developing countries. Using a multiregional input-output model, in this paper, we trace the CO2 emissions and value added attributable to the foreign affiliates of multinational enterprises (FMNEs) to quantify the trade-offs between the economic benefits and environmental impacts along their global supply chains. The results show that FMNEs in most countries induce greater contributions to CO2 emissions than to value added along their supply chains. This is mostly explained by the concentration of MNEs production in industries with a high CO2 burden (manufacturing sectors) and their relatively low participation in high-value added activities (services). The analysis also shows that FMNEs generally have higher carbon intensities than domestic-owned firms in the same sector, especially in OECD countries, which undermines the efforts made by those countries to reduce global emissions. FMNEs incorporate larger portions of imported emissions into their carbon footprint than domestic companies, so they more often take advantage of carbon leakages and are more vulnerable to a potential carbon border tax. Since developed countries own the affiliates producing 89% of FMNEs’ global output, those countries should design policies to reduce the carbon footprints of their MNEs’ foreign activities in both developed and developing countries.

Determinants and regional contributions of industrial CO2 emissions inequality: A consumption-based perspective

The assessment of industrial consumption-based carbon dioxide emissions could explain interregional differences in carbon dioxide emissions resulting from economic activity. This study aims to assess per capita industrial consumption-based carbon dioxide emissions inequality across provinces, municipalities, and autonomous regions in China from 2002 to 2017. The status and main determinants of per capita industrial consumption-based carbon dioxide emissions inequality are calculated using environmentally multi-regional input–output models and the Theil index, respectively. Comparisons with accounting results from the production side are then analyzed. The main conclusions are as follows: (1) From 2002 to 2012, both per capita industrial consumption-based carbon dioxide emissions and per capita industrial production-based carbon dioxide emissions in China show an obvious upward trend, and gradually stabilize in 2015 and beyond. (2) Economic trade leads to obvious carbon leakage among Chinese provinces and industrial sectors: the consumption-based carbon dioxide emissions of the downstream sector of the industrial supply chain is less than its production-based carbon dioxide emissions, while the carbon dioxide emissions of upstream industrial sectors is on the contrary. (3) China's per capita industrial production-based carbon dioxide emissions inequality is significantly greater than consumption-based inequality, and this gap is gradually widening. Among them, between-group inequality is the key component, but the contribution of within-group inequality is gradually increasing, which tends to exceed between-group inequality. (4) Among the eight economic groups in China, per capita consumption is the main driving factor of consumption-based carbon dioxide emissions inequality, but the industrial production carbon dioxide emissions intensity is the main contributor to production-based inequality. The above findings would provide certain theoretical support and policy references for policymakers when formulating industrial carbon emissions reduction policies.