Reduce Carbon Leakage Research Articles

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

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

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.

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.

The carbon border adjustment mechanism is inefficient in addressing carbon leakage and results in unfair welfare losses

The European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) to reduce carbon leakage and create a level playing field for its domestic products and imported goods. Nevertheless, the effectiveness of the proposal remains unclear, especially when it triggers threats of retaliation from trading partners of the European Union. We apply a Computable General Equilibrium model - Global Trade Analysis Project - to assess the economic and environmental impacts of different CBAM schemes. Here we show that the effectiveness of the CBAM to address carbon leakage risks is rather limited, and the CBAM raises concerns over global welfare costs, Correct to Gross Domestic Product (GDP) losses, and violation of equality principles. Trade retaliation leads to multiplied welfare losses, which would mostly be borne by poor countries. Our results question the carbon leakage reduction effect of a unilateral trade policy and suggest that climate change mitigation still needs to be performed within the framework of international cooperation.

Carbon border adjustment mechanism: a systematic literature review of the latest developments

ABSTRACT Carbon border adjustment mechanism aims to level the playing field and reduce carbon leakage through import taxes and/or export subsidies based on the carbon content for products from countries with different levels of carbon policy stringency. The introduction of an EU carbon border adjustment mechanism (CBAM) has triggered a lively debate on its potential impacts, especially among developing countries. In fact, introducing CBAM is not a new idea; researchers in fields of economics and law have investigated this policy over the last decade. Against this backdrop, this study conducts a literature review of the most recent economic studies of CBAM and provides an exhaustive synthesis of this literature. We employ the so-called ‘Preferred Reporting Items for Systematic Reviews and Meta-Analysis’ approach (PRISMA), which includes an exhaustive screening of studies. Specifically, we identified 97 relevant studies on CBAM from 2004 to 31 August 2021, and conducted descriptive and content analysis of these. Our content analysis highlights the potential impacts of CBAM in terms of its effectiveness across 3 policy objectives: protecting fair competition; reducing carbon leakage; and limiting global welfare costs. We synthesize findings on how policy design and characteristics of an economy lead to different levels and types of effectiveness of a CBAM, and we contrast alternative policy designs across various objectives. Armed with this systematic review of the literature, we spell out insights and challenges in formulating effective CBAM polices. This review thus offers evidenced-based guidance for the policy design of a CBAM and a foundation for further research. Key policy insights There is no one-size-fits-all approach to design and implement CBAM to tackle competitiveness and carbon leakage; policy design and characteristics of the economy matter. According to the effectiveness of CBAM across the 3 policy objectives, alternative policy designs should account for the coverage of trade, of sector(s), and also the means to determine carbon content of traded commodities, the use of revenues collected through CBAM, and the adjustment price. In formulating sound CBAM policies, competitiveness, carbon leakage and welfare evaluation are central economic concerns; however, consistency with the latest international climate policy architecture and fairness issues should also be addressed.

Welfare Implications of Border Carbon Adjustments on the Trade of Harvested Wood Products.

Border carbon adjustments (BCAs) are designed to regulate carbon emissions and reduce carbon leakage. Thus far, BCAs are mainly applied to imported carbon-intensive products. On the other hand, harvested wood products (HWPs) are the extension of forest carbon stocks, whose changes affect a country's carbon stock level. Nonetheless, the trade of HWPs also raises the problem of carbon leakage when their carbon stocks are exported, which can be partially solved by applying export BCAs. We construct a two-stage game model to analyze the strategy changes of the government and forestry companies under BCAs: the first stage is output competition in a Cournot game similar to the trade of HWPs between New Zealand and China; the second stage is the setting of the tax rate of BCAs by the country. We use the inverse solution method to derive the results of the game. Our results find that the government imposes BCAs on exports of HWPs when the carbon stock value exceeds a threshold. Moreover, the export BCAs on HWPs can effectively reduce the amount of HWPs exported. The results also show that BCAs diminish forestry exporters' revenues and consumer surplus while having no significant detrimental impact on a country's welfare. BCAs help include carbon stock values into HWPs' prices and reduce carbon leakage, which is beneficial for climate change. Thus, exporting countries can maintain their welfare by implementing BCAs, and the forestry companies can respond by improving product quality, enhancing product uniqueness, and reducing production costs.

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.

A simple fix for carbon leakage? Assessing the environmental effectiveness of the EU carbon border adjustment

As part of its ambitious European Green Deal package, which aims to accelerate the EU's transition to climate neutrality, the European Commission has proposed a “carbon border adjustment mechanism” to address the risk of carbon leakage. In order to evaluate the effectiveness of the measure, this study models and compares three versions of a carbon border adjustment in a Computable General Equilibrium framework. The analysis shows that the Commission's proposal, which does not cover indirect emissions and is limited to imports, would reduce carbon leakage to a similar extent (by around one third) as the current free allocation system, which it would replace. However, it would generate substantial revenues (of up to 32 bn USD annually) that could be used to support low-carbon innovation and international climate finance. The analysis also shows that alternative versions of the carbon border adjustment, which would cover indirect emissions and grant export rebates on carbon costs, would further increase the measure's effectiveness; but that these gains should be weighed against the legal and political risks incurred.

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.

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.

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.

AVRUPA YEŞİL MUTABAKATI’NIN TÜRKİYE ELEKTRİK PİYASASINA ETKİLERİ

As it is commonly believed that the planet is facing environmental disasters as a consequence of climate change, the European Union intends to inspire a sustainable green transition. The European Commission presented “The European Green Deal” as an indicator of this leading mission, which is a reaction to a warming atmosphere, climate change and polluted air. The European Green Deal aims to transform the countries and citizens of the European Union into a fair and competitive environment where greenhouse gas emissions will be zero by 2050. Above all, the European Green Deal is also committed to transforming the greenhouse gas emissions of other countries. Turkey, one of the leading countries in terms of the volume of trade with Europe, is required to examine the issue of carbon emissions in detail. If it were not, the European Union and Turkey could end the commercial agreements under the carbon-border adjustment mechanism of the Commission aimed at reducing carbon leakage risk, where the electricity sector is one of Turkey's most associated greenhouse gas emissions sectors. The objective of this study is to examine the effects of the Green Deal on Turkey’s electricity market from both the supply and demand side, which will be affected by the Deal's carbon limits or enforcement. In addition, in this study, a road map for Turkey’s electricity market is offered via comparative analysis method under the requirements of The European Green Deal.

Addressing the concerns about carbon leakage in the implementation of carbon pricing policies: a focus on the issue of competitiveness

This article investigates whether the implementation of asymmetric carbon pricing policies leads to carbon leakage. We first present the theoretical mechanisms behind carbon leakage. Secondly, we conduct a review of the existing empirical results of carbon leakage. We focus on the competitiveness channel and therefore rely on papers analysing the effects of asymmetric carbon prices on both trade and investment flows. Lastly, we discuss solutions to reduce carbon leakage, so that acceptability towards ambitious carbon pricing policies can be maximized.

IMPACTS OF MECHANISMS TO PROMOTE PARTICIPATION IN CLIMATE MITIGATION: BORDER CARBON ADJUSTMENTS VERSUS UNIFORM TARIFF MEASURES

Because free-riding behavior is an inherent characteristic of climate change, how to protect the economic benefits of the emission reduction regions and prompt the noncooperative region to join the emission reduction coalition is particularly important. In this study, we use a global multi-region multi-sector CGE model to compare the impacts of border carbon adjustment (BCA) and two unified tariff mechanisms based on different implementation principles on USA. The results show that the BCA is more effective in reducing carbon leakage in USA than the uniform tariff mechanisms. However, for GDP and welfare losses, the scenario Tariff-carbon-reduction results in greater GDP and welfare losses in USA, which is more conducive to prompting USA to implement carbon reduction policies than the BCA measures. Finally, the sensitivity analysis of carbon price levels and key substitution elasticity further confirmed the results.

Carbon leakage in energy/forest sectors and climate policy implications using meta-analysis

Carbon leakage, a shift of carbon emissions from a region with emission constraint to unregulated areas, has been a great concern in energy-related industries and the forest sector. Carbon leakage may weaken the effectiveness of regional climate policies. This study aims to identify the drivers of carbon leakage and provide policy implications to mitigate carbon leakage using meta-regression. A total of 46 studies are collected, which provide 230 estimates of carbon leakage. Results show that (i) the forest sector has larger carbon leakage of 39.6%; (ii) substitution degree increases carbon leakage, but it is not statistically significant; (iii) contrary to popular belief, coalition size is not always negatively related to carbon leakage; (iv) local economic conditions are key drivers of carbon leakage; and (v) carbon leakage is overestimated in the forest sector by 41.42% when ignoring agricultural expansion through the land use change. Results also support the following policy implications: (i) the global agreement, which requires the participation of poorer regions and countries, may effectively reduce carbon leakage; (ii) a mature worldwide carbon trading market with relatively high carbon prices can attract more participants; and (iii) a long-term and integrated land-use planning will be an effective way to reduce carbon leakage caused by agricultural expansion.

Measures to enhance the effectiveness of international climate agreements: The case of border carbon adjustments

Actions on climate change which are not supported by all countries are not very effective. However, full participation in a global climate treaty with meaningful emission reductions is difficult to achieve. The non-excludability of the public good mitigation provides an incentive to abstain from global action. Moreover, carbon leakage renders it unattractive to join a treaty without full participation. We study whether and under which conditions border carbon adjustments (BCAs) can mitigate free-riding and reduce carbon leakage in a simple strategic trade model. We show that BCAs can lead to large stable climate agreements, including full participation, associated with large global welfare gains if treaties do not restrict membership (open membership), as this is typical for environmental agreements. We caution against restricting accession to treaties (exclusive membership), as this is typical for trade agreements, which may serve individual but not global interests.

Are Developed Regions in China Achieving Their CO2 Emissions Reduction Targets on Their Own?—Case of Beijing

The extensive and close economic linkages among different regions of China have effects not only on regional economic growth, but also on CO2 emissions and carbon leakage among regions. Taking Beijing as a study case, we constructed MRIO models for China’s 30 provinces and municipalities for 2002, 2007 and 2010, to measure the embodied CO2 emissions in the interregional trade of China on regional and industrial levels to explore their changes over time, and to analyze the driving forces of the final demand-induced interregional CO2 emissions through an SDA model. Results showed that Beijing was a surplus region for embodied carbon and the net input embodied CO2 emissions were in industries with high CO2 emission coefficients, while the net output embodied carbon was in industries with low carbon-emission coefficients. Beijing’s trade with non-Beijing areas led to an increase in the total CO2 emissions in China and a composite effect of Beijing and the efficiency effect of non-Beijing areas were the main effects behind the reduction of Beijing’s input embodied carbon. The results have yielded important implications for China’s CO2 emissions control: first, the embodied CO2 need be taken into consideration when formulating CO2 emissions control measures; second, CO2 emission reduction requirements should be reasonably distributed across the provinces to reduce carbon leakage in interprovincial trade; third, the consumption structure in the production chain needs to be moderately adjusted; and last but not least, financial and technical support for CO2 emissions control in the central and western provinces should be strengthened.

Carbon tariffs: An analysis of the trade, welfare, and emission effects

The potential of carbon tariffs to restore competitiveness, avoid carbon leakage, and reduce global carbon emissions has been prominently discussed. To analyze the effects of carbon tariffs on trade, welfare, and carbon emissions, we develop a multi-sector, multi-factor structural gravity model that allows an analytical and quantitative decomposition of the emission changes into scale, composition, and technique effects. Our analysis shows that carbon tariffs are able to reduce world emissions, mainly via altering the production composition within and across countries, hence reducing carbon leakage. This reduction comes at the cost of lower world trade flows and lower welfare, especially for developing countries. Applying our framework to investigate the effects of the emission reduction pledges made by the Annex I countries in the Copenhagen Accord, we find that combining national emission targets with carbon tariffs would increase the Accord's effectiveness by lowering the leakage rate from 13.4% to 4.1% (with bootstrapped 95% confidence intervals of [11.5, 15.8] and [3.3, 4.9], respectively).

Investigation of the potential impact of the Paris Agreement on national mitigation policies and the risk of carbon leakage; an analysis of the Irish bioenergy industry

A criticism of production-based reporting and accounting of greenhouse gas emissions, as implemented under the UNFCCC and Kyoto Protocol, is the risk of mitigation measures adoption in one country to reduce national emissions, leading consequentially to the displacement of the source activity to other jurisdictions, thus resulting in an increase in net global emissions referred to as “carbon leakage”. An important outcome of the 21st Conference of the Parties (COP) to the 1992 UNFCCC may be “plugging” of carbon leakage. This study examined the bioenergy industry in Ireland to determine the extent of existing carbon leakage due to national energy policy and to establish if measures identified within the relevant intended nationally determined contributions will result in plugging of carbon leakage. The study focused on co-firing of biomass with peat, the major use of biomass for energy generation in Ireland. The results show that significant levels of carbon leakage occur due to reliance on imported biomass feedstocks to meet co-firing targets under Irish energy policy. In the post-COP21 scenario, one of the three Intended Nationally Determined Contributions analysed contains a measure which has the potential to reduce greenhouse gas emissions from imported biomass by 32%, highlighting the potential of the Paris Agreement to reduce carbon leakage.

Adaptation to climate change: how does heterogeneity in adaptation costs affect climate coalitions?

AbstractAdaptation costs to climate change vary widely across countries, especially between developed and developing countries. Adaptation costs also influence a country's decision to abate and join international environmental agreements (IEAs). In this paper, the authors study how these cost differences affect participation incentives. Their model identifies two channels through which adaptation affects free-riding incentives: carbon leakage and cost asymmetry in adaptation. In contrast with the common view, the authors find that the presence of adaptation is not necessarily an impediment to cooperation on abatement. They also present conditions under which adaptation can strengthen or weaken free-riding incentives. The results serve as a cautionary tale to policy makers and suggest that policies directed at reducing carbon leakage and/or cost differences between developed and developing countries may also affect the success and failure of IEAs.