Prevent Carbon Leakage Research Articles

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.

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.

International climate policy dilemmas: Examining effective carbon tariff and cap-and-trade regulation from a sustainable insurance perspective

This paper introduces a contingent claim model, offering a financial perspective on the global climate policy challenge. The model prioritizes the use of carbon tariffs to prevent carbon leakage and cap-and-trade initiatives to incentivize carbon emission reductions. In this model, manufacturers in an exporting country's supply chain collaborate with a life insurance company to acquire carbon allowances through the cap-and-trade mechanism. The importing country enforces carbon tariffs to protect its import-substitution industries and to prevent carbon leakage, assessed by the effective carbon tariff rate. Our findings show that increasing carbon tariffs on final products and intermediate goods reduces equity for both the life insurance company and the importer but strengthens carbon tariff protection. Conversely, a stricter regulatory cap within the exporting country's cap-and-trade system bolsters equity for the life insurance company and the importer but weakens carbon tariff effectiveness in the importing country. This dilemma underscores the urgent need for global collaboration in managing carbon emissions. Our research highlights the complex challenges of global climate policies. It is suggested to foster efficient and sustainable international cooperation in shaping climate policies to address these challenges.

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.

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.

Macroprudential policies and CO2 emissions: A comparative analysis of G7 and BRIC countries.

This study investigates the impact of macroprudential policies on CO2 emissions in G7 and BRIC countries using country-level panel data from 11 countries, covering the period from 1992 to 2020. The findings indicate that macroprudential policies alleviate CO2 emissions in the sample. Quantile regression results reveal that policies can exacerbate CO2 emissions in countries with high levels of CO2 emissions due to carbon leakage. The positive impact of macroprudential policies on sustainable development can be strengthened by high level of globalisation. Moreover, the influence of macroprudential policies stayed the same based on the basic regression results during the post-global financial crisis (GFC) period, while the impact was positive in the pre-GFC period. Finally, robust tests validated the findings reported in the basic regression model. From this, policymakers should prioritise sustainable economic growth when implementing macroprudential policies and leverage the influence of globalisation to amplify their impact on CO2 emissions. Furthermore, it is crucial to strengthen environmental regulations to prevent carbon leakage that result from industries seeking lenient standards.

Carbon reduction in global supply network design subject to carbon tariffs and location-specific carbon policies

Carbon policies are often limited to specific regions. To avoid stricter carbon emission requirements, companies relocate production to regions without carbon policies that offer a higher degree of flexibility. This effect is known as carbon leakage. To prevent carbon leakage, carbon tariffs are imposed on carbon emissions imported into regulated regions. We present a new model formulation for the design of a global supply network subject to carbon tariffs and location-specific carbon policies. Relevant carbon emissions are captured by a product carbon footprint. This model plans the locations of manufacturing plants and distribution centers and the transportation between them. In addition, we consider the choice of production technologies to enable carbon reduction. The objective is to minimize the net present value. To solve this supply network design model, we apply a fix-and-optimize heuristic. Our numerical study demonstrates that the heuristic provides high-quality solutions in a reasonable time frame. We indicate that combining carbon tariffs with location-specific carbon policies fundamentally changes the economic and environmental consequences for the network design. In addition, we examine how carbon tariffs and location-specific carbon policies affect the choice of carbon-reducing production technologies.

EU 탄소국경조정제도 시행에 따른 국내 산업계 대응 방향 제언

The EU Commission has introduced the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage and strengthen EU industrial competitiveness, with the transitional period running from October 1, 2023 to December 31, 2025, and the definitive period starting January 1, 2026. In the definitive period, there are various obligations such as measuring embedded emissions using only the EU CBAM methodology, reporting and verification once a year, and purchasing and submitting CBAM certificates, while in the transitional period, only quarterly reports are required. However, small and medium-sized enterprises with relatively weak MRV capabilities are expected to face difficulties in submitting CBAM reports. Therefore, this study focuses on the transition period of the EU CBAM, analyzes the main implementation of the transitional period, such as the calculation of embedded emissions, and suggests the response direction for Korean companies.

Impact of carbon border adjustment mechanism on China's manufacturing sector: A dynamic recursive CGE model based on an evolutionary game

As the global carbon emission problem is getting more and more serious, the European Union has proposed the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage, which will have an impact on China's foreign trade. Based on this background and the problems of current research that ignores factors such as commodity prices, long-term impacts, intertemporal substitution analysis, and changes in national strategies for foreign exports, this paper propose a Computable General Equilibrium (CGE) model based on an evolutionary game as a dynamic recursive basis to study the impact of the CBAM on the Chinese manufacturing industry. For the industries mentioned in the CBAM, 18 affected sectors are collated, and a CGE model containing multiple blocks such as production, trade, and carbon emissions is built. Meanwhile, we establish an evolutionary game model with EU suppliers, manufacturers, and the government, allowing Chinese suppliers to compete with EU suppliers. Based on the above model, the impact of carbon tariff policies from 2020 to 2050 is studied. The results indicate that under the intra-EU competition condition, carbon tariffs will reduce the price of Chinese exports and slightly decrease China's real GDP, as well as the carbon emission intensity of 18 sectors and fossil energy. However, the impact of carbon tariffs on overall carbon emissions is small and is essentially a protective policy. In addition, the evolutionary game-based CGE model takes into account the dynamic strategies of both sides and is therefore less affected by carbon tariff shocks and recovers more quickly and more realistically. Finally, the article argues that the advantage of carbon tariffs for local suppliers is unsustainable and Chinese suppliers will still dominate, and local suppliers need more subsidies from the EU government. On the other hand, the Chinese government needs to implement a stricter carbon tax regime and export subsidies to improve the competitiveness of Chinese products in terms of green levels and price advantages. The purpose of this paper is to examine the quantitative impacts of CBAM on China's related manufacturing industries and strategies to maximize the benefits to both governments.

Tracking Carbon Flows from Coal Mines to Electricity Users in China Using an Ensemble Model.

Accurately tracking carbon flows is crucial for preventing carbon leakage and allocating responsibility for reducing CO2eq emissions. In this study, we developed an ensemble model to effectively track carbon flows within China's power system. Our approach integrates coal quality tests, individual power plant datasets, a dynamic material-energy flow analysis model, and an extended version of an interconnected power grid model that incorporates transmission and distribution (T&D) losses. Our results not only provide accurate quantification of unit-based CO2eq emissions based on coal quality data but also enable the assessment of emissions attributed to T&D losses and emission shifts resulting from interprovincial coal and electricity trade. Remarkably, for CO2eq emissions from coal-fired units, the disparity between the guideline and our study can be as high as [-95%, 287%]. We identify Guangdong, Hebei, Jiangsu, and Zhejiang provinces as the major importers of both coal and electricity, responsible for transferring nearly half of their user-based emissions to coal and power bases. Significantly, T&D losses, often overlooked, contribute to 15-20% of provincial emissions at the user side. Our findings emphasize the necessity of up-to-date life cycle emissions and spatial carbon shifts in effectively allocating emission reduction responsibilities from the national level to provinces.

European Regulatory Approaches to Preventing Carbon Leakage: Rolling Back Johnson’s EU ‘Diplomacy’ for a Brighter Environmental Future

Further to the EU carbon regulatory framework, particularly the EU Emissions Trading Scheme and the EU Carbon Border Adjustment Mechanism (CBAM), this legal and related implementation research addresses the regulatory future of carbon leakage prevention within the UK industrial sector. Carbon leakage from other countries or sectors will not be addressed. Further, the UK ETS will be the central regulatory mechanism from which carbon leakage will be considered while other avenues will not be addressed. The scope will be narrowed further for a case study, which explores the regulatory scenario in the context of the UK cement industry as a demonstration of a regulatory scenario in action. To the best of the authors’ knowledge, no research currently explores future prevention of carbon leakage in the UK ETS with specific qualitative analysis of the UK cement industry. This research is designed to fill this gap. This research also identifies and analyses the regulatory options available to prevent carbon leakage in the UK ETS for the UK industrial sector, to guide future regulatory strategy with continuing EU regulatory alignment in mind, at least as a means of Brexit damage control limitation noting that Johnsonian Anti-EU diplomacy needs to be reversed in the UK environmental and economic interest. Among the objectives of the research, we review and critique the evidence base for carbon regulatory leakage within the UK’s industrial sector, and the historical and current regulatory strategies to avoid it. We analyse how a particular regulatory scenario may apply to the UK cement industry, and how the industry may be affected by the implementation of this regulatory scenario. Interviews with key experts and stakeholders were conducted in order to reinforce and validate the literature and case study analysis. After an Introduction (section I), the research design is explained and justified in methodological terms (section II). Then we conduct a literature analysis to address the phenomenon of carbon leakage in its current and historical context (section III). A regulatory scenario is developed and presented in section IV to understand CBAM implementation challenges. In section V we conduct a case study of CBAM and the cement industry to further explore the regulatory scenario. Section VI, the Discussion section addresses semi-structured interview responses which are thematically analysed alongside findings from previous sections. Finally, we conclude with remarks about key findings, limitations and future research opportunities. In summation, if the UK hopes to meet its ambitious climate goals, an updated carbon leakage strategy is required to mitigate this. The UK should immediately consider how it wishes to align with the EU ETS on these regulatory matters. Experts across sectors agreed that pursuing linkage of the UK ETS with the EU ETS and implementing a similar CBAM would benefit the UK. If this is the regulatory future of choice, alignment of current regulatory strategy with this goal is required sooner rather than later. Emissions Trading, Regulation, EU ETS, UK ETS, Carbon Border Adjustment Mechanism, European Union, United Kingdom

Carbon pricing, border adjustment and climate clubs: Options for international cooperation

In a dynamic, three-region environmental multi-sector general equilibrium model, we find that carbon pricing generates a long-lasting downturn as production costs rise. Dirty production is shifted towards countries with laxer climate policies, known as carbon leakage. A border adjustment tax mitigates but does not prevent carbon leakage. Its impact on emissions is limited, and it mainly “protects” dirty domestic production sectors with tradeable goods (in relative terms). Benefits from lower emissions damage materialize only in the medium to long run. From the perspective of a region that introduces carbon pricing, the downturn is smaller and long-run benefits are larger if more regions participate. However, for non-participating regions, there is no incremental incentive to participate as they forego trade spillovers and face higher production costs along the transition. Because of the costly transition, average world welfare may fall as a result of global carbon pricing unless “the rich” assist “the poor”.

EU in search of a Carbon Border Adjustment Mechanism

To meet the targets of the EU’s Fit for 55 package, the European Commission proposed in July 2021 to implement a Carbon Border Adjustment Mechanism (CBAM) to replace free allocation of Emission Trading System (ETS) allowances for the most trade-exposed emitting industries. CBAM aims to prevent carbon leakage and restore a level playing field in high-emitting industries. Its design, as voted by the European Council in March 2022, by the Parliament in June, and ultimately amended by a provisional agreement between the Council and the European Parliament in December 2022, raises several issues. This paper aims to quantify the economic and environmental impacts of different choices regarding this design. Simulations are based on a dynamic general equilibrium model representing imperfect competition, input–output relations, greenhouse gas emissions, the endogenous price of emission quotas and the presence of free allocation of allowances. We show that CBAM is effective in reducing carbon leakage. But its design increases the price of carbon in the European Emissions Trading Scheme. Competitiveness losses in export markets are expected for downstream sectors that are not covered by the CBAM, as well as for European exporters of high-emitting industries, even in the presence of rebates.

Carbon dioxide emission typology and policy implications: Evidence from machine learning

The policy design of carbon dioxide (CO2) emission mitigation is a hotly debated topic in the context of “Carbon Peak and Carbon Neutrality” in China. This paper contributes to this debate by employing an unsupervised machine learning algorithm to uncover the CO2 emission typology based on the provincial emission data in China from 2000 to 2018 for a precise design of CO2 emission mitigation policy for heterogenous regional patterns. The results indicate that we can cluster the provinces into four CO2 emission patterns: the under-developed pattern, the coal-dominated pattern, the oil-dominated pattern, and the gas-dominated pattern. Notably, both the under-developed pattern and the coal-dominated pattern have a large amount of CO2 emission from fossil fuels, while the gas-dominated pattern could be regarded as the policy inclination as it relies more on low-carbon fuels. Moreover, we also reveal the transition routes of emission patterns from a dynamic perspective, which could help policymakers better understand the future trend of emission patterns in different regions. On the one hand, the CO2 emission mitigation policies could have specified priorities in different patterns, ensuring the feasibility during the process of policy implementation. On the other hand, establishing a national unified carbon trade market could facilitate efficient energy transition in China, and prevent carbon leakage cross different regions as well.

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 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.

ANALYSIS OF THE CARBON ALLOWANCE ALLOCATION AND SECTORAL COVERAGE IN THE CARBON MARKET UNDER THE NEW CLIMATE AMBITION: A CASE STUDY IN CHINA

Reasonable allocation of carbon allowances and determination of coverage in the carbon market are essential to the realization of the emissions reduction goal. Using China as an example, we propose a multi-criteria allocation scheme based on the principle of equity, efficiency and feasibility, considering carbon abatement costs and carbon leakage risks. An improved zero-sum gains-data envelopment analysis model in accordance with China’s new carbon intensity target in climate ambition is used for allowance allocation. Subsequently, the sectoral coverage choice of the carbon market is proposed. We obtain an optimal reallocation scheme after five iterations. The results show that the allocation method in this study can better promote the carbon market to reduce emissions at a lower cost while preventing carbon leakage to a certain extent. Based on the contribution to the overall emission reduction, the emission reduction costs and carbon leakage risks, we further classify the sectors into three categories. With China as an example, these findings lay a scientific basis for China to achieve its climate ambition through the carbon market, and also have global implications in regard to developing a more scientific allocation scheme, especially for carbon markets in emerging and developing countries.

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.

A Canadian Border Carbon Adjustment? GATT Compliance and Underexplored Exceptions

Canada is one of thirty-one countries covered by a national carbon pricing mechanism. Complementary border carbon adjustment (BCA) on imports is the next step for preventing carbon leakage from these thirty-one jurisdictions. Existing commentary assessing the legitimacy of a BCA under the General Agreement on Tariffs and Trade (GATT) focuses on the European Union (EU) and the United States (US) and favours the more conventionally used exceptions for protecting environment and conserving natural resources through Articles XX(b) and (g). This article contributes to the literature by flagging that Article XX(b) may not be the most promising route for Canada and provides a fresh characterization of Article XX(g). This article further breaks with convention and takes the road less trod by considering the strength of Articles XX(a) public morals, (d) compliance with laws and regulations, (f) national treasures, and XXI security exceptions. It is challenging to fit modern solutions to complex problems into the GATT, but the WTO needs to demonstrate its responsiveness to change in order to maintain relevancy and legitimacy. Afterall, there can be no trade on a dead planet. Border carbon adjustment, WTO, Article XX GATT, Article XXI GATT, Canada, climate change, climate action, carbon pricing

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.