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Driven by the motivation to raise the ambition level of climate action and to foster the transformation of economies, current climate policy discourse revolves around ways to improve cooperation between industrialized countries and emerging economies. We identify three broad types of initiatives—multilateral-cross sectoral, multilateral, sector specific, and climate and development partnerships—and assess them for potentials to deliver on such objectives with a specific focus on industry transformation. This paper provides new reflections on the institutionalization of international climate cooperation. Specifically, we demonstrate the urgent need to understand what values, norms, and underlying principles drive a cooperation in order to draw conclusions on how to best institutionalize climate cooperation rules.in-use. We conclude that an overemphasis on a CO2 price and on carbon border adjustment mechanisms, such as in the context of the initial proposals for a cross-sectoral climate club envisaged by G7 countries, would have contributed to a further polarization of the international landscape. We find, however, that multilateral, sectoral alliances play an important role for international goal setting and the convergence on standards, metrics, and benchmarks. Based on our analysis, we recommend strengthening multilateral, sector-specific partnerships. These can be focused on sectoral topics as a connector between countries, allowing for a strategically-aligned, increasingly deep collaboration. However, for any initiative to succeed, processes of international institutionalization will be needed in order to agree on rules for implementation based on aligned interests and equity. Building such institutions may well serve as a steppingstone toward more durable cooperation structures between developed economies and emerging economies. In sum, no existing cooperation approach is perfect, but three actions may be taken to move the agenda forward: First, reform of the carbon border adjustment mechanism and removing it from the center of climate club discussions, second, coupling sectoral alliances with climate and development partnerships, and three, designing them in a way to address fears of political influence seeking and superimposition of global north agendas on the global south. [ABSTRACT FROM AUTHOR]

This paper sheds light on the unidentified effects of unilateral environmental and trade actions within an international trade framework with two large open economies, transboundary pollution, and Public Pollution Abatement (PPA) activities. When private and public abatement coexists in the exporting country, stricter environmental policy by the importing one magnifies the carbon leakage effect. Pareto efficiency dictates that Border Carbon Adjustment (BCA) should account not only for the difference in carbon taxes between the two countries, but also for the policy's unintended consequences on PPA. More importantly, we argue that a conditional reduction of BCA, subject to stricter environmental policy by the country that exports the polluting good, decreases global pollution and increases countries' welfare. Such reform strategy generates strong incentives for countries with laxer environmental policy to adopt a stricter one. [ABSTRACT FROM AUTHOR]

The need to decarbonise has accelerated the quest to find solutions for sectors considered emissions-intensive and trade-exposed. Steel production is one such sector. Policymakers are responding with market-pull and technology-push mechanisms. Risks of carbon leakage have prompted consideration and implementation of border carbon mechanisms. Measures have drawn both positive and negative attention in internationally traded markets. This research quantifies the equivalence of differing measures to promote decarbonisation. It simulates the annual cost-saving equivalent and net present values of different mechanisms in a theoretical conversion to steelmaking with Electric Arc Furnace (EAF) technology from traditional steel production. It demonstrates that, under certain assumptions including removal of free allocation of emissions certificates, incentives per tonne of direct and indirect greenhouse gas emissions for carbon pricing and border carbon adjustments lie in the range EUR 18–76 whereas for cost-of-capital support measures it was EUR 24–41 per tCO2e. Whether firms act upon these incentives will depend on appetite for risk, availability of technology, feedstocks, choice they have in making changes and perceived sustainability of the assumptions made in investment analysis. There are implications for regulators, policy makers and managers as they prepare strategies to be competitive in an increasingly carbon-constrained environment. Highlights: Steel subsidisation effects can be expressed as per tCO2e emissions equivalent. Removing ETS free allocation creates strong steel decarbonisation incentive. To level playing field, border carbon adjustments should consider capital structure. Voluntary incentives can drive innovation by firms equally as do mandatory standards. Long-live investments require market assumptions that can be difficult to hedge. [ABSTRACT FROM AUTHOR]

While the EU is working toward the implementation of the world's first Carbon Border Adjustment (CBA) Mechanism, a gap remains between the ways in which carbon leakage and CBAs are discussed in policy spheres and economic evidence on these topics. The aim of this paper is to bridge this gap by presenting the EU's policy context, systematically reviewing the economic literature on carbon leakage and CBAs, and discussing potential future research avenues. Three channels of leakage are identified in our literature review: the competition, energy and innovation channels. The main finding of this paper is that while the competition channel is well understood and taken into account by policymakers, the energy and innovation channels are generally not considered. Policy recommendations are provided to better account for these two channels. [ABSTRACT FROM AUTHOR]

As an instrument to minimize carbon leakage, the effects and feasibility of Carbon Border Adjustments Mechanism (CBAM) will depend on multiple design options. While the EU has committed to introducing CBAM as part of its green climate deal, pursuing climate efforts to successfully limit global warming requires a collective implementation involving major emitters China and the US. This paper quantifies the distributional impacts of a joint CBAM implementation of in a climate alliance or a club of the EU, the US, and China. Differing from a myriad of studies that focus on unilateral CBAM, this analysis emphasizes collective implications on leakage, sectoral competitiveness, and welfare by projecting climate neutrality relative to current policies and climate targets. Our findings confirm that coalition reduces leakage, improves production on energy-intensive industries, and increases club's welfare relative to a non-CBAM and a unilateral implementation. These are in contrast with some unilateral analytical studies, especially for the US. It is further proof of the potential of CBAM as collective instruments to facilitate mitigation and trade competitiveness. [ABSTRACT FROM AUTHOR]

We analyse the international impact on carbon emissions from national climate legislation in 111 countries over 1996–2018. We estimate trade-related carbon leakage, or net carbon imports, as the difference between consumption and production emissions. Legislation has had a significant negative and roughly similar impact on both consumption and production emissions. The net impact on trade-related emissions is therefore not statistically significant, neither in the short term (laws passed in the last 3 years) nor the long term (laws older than 3 years). We find a significant negative long-term impact on domestic emissions from laws passed by trade partners. This latter specification corresponds to the traditional definition of carbon leakage. Overall, we conclude that there has been no detrimental effect of climate legislation on international emissions. [ABSTRACT FROM AUTHOR]

We estimate the effects of a European Carbon Border Adjustment (CBA) mechanism on exports, real GDP, welfare and emissions using the multi-region, multi-sector structural gravity model of Larch and Wanner (2017). Incorporating the main industries covered in the proposal of the European Commission from mid-2021, as well as its other design features, and assuming prevailing CO2 prices, we find only small effects of the European CBA mechanism. EU exports are estimated to decline by 0.04%, while CO2 emissions in EU countries increase by 0.24%. These negligible results mask larger adjustments at the sectoral level. The structural changes will shift the EU economy towards more emission-intensive industries, which will make achieving its climate goals harder. On the positive side, the European CBA mechanism will reduce global emissions by 0.08%. Given the minute economic costs in terms of GDP and welfare losses, the CBA mechanism seems an appropriate policy tool, though its proposed design will not be able to make a significant contribution to mitigating global climate change. [ABSTRACT FROM AUTHOR]

The amount of CO2 embodied in trade has substantially increased over the last decades. We contribute to understanding the reasons for this evolution by studying the trends and some drivers of the carbon intensity of trade over the period 1995–2009 in 41 countries and 35 sectors. Our empirical analysis relies on the World Input-Output Database (WIOD) to compute embodied carbon emissions. Our main findings are the following. First, average emission intensity of traded goods is higher than average emission intensity of final demand. Second, relatively "dirty" countries tend to specialize in emission-intensive sectors. Third, the share of goods produced in emission-intensive countries is rising. Finally, we find that coal abundance (measured as fuel rent and controlling for reverse causality) leads both to a specialization in "dirty" sectors and to an increase in emissions per output when controlling for sector structure, which amounts to a fossil fuel endowment effect. These findings suggest trade liberalization may increase global emissions and therefore highlight the importance of considering trade when designing CO2 reduction strategies. [ABSTRACT FROM AUTHOR]

Although climate change and international trade are interdependent, policy-makers often address the two topics separately. This may inhibit progress at the intersection of climate change and trade and could present a serious constraint for global climate action. One key risk is carbon leakage through emission outsourcing, i.e. reductions in emissions in countries with rigorous climate policies being offset by increased emissions in countries with less stringent policies. We first analyze the Paris Agreement's nationally determined contributions (NDC) and investigate how carbon leakage is addressed. We find that the risk of carbon leakage is insufficiently accounted for in these documents. Then, we apply a novel quantitative approach (Jiborn et al., 2018; Baumert et al., 2019) to analyze trends in carbon outsourcing related to a previous international climate regime—the Kyoto Protocol—in order to assess whether reported emission reductions were offset by carbon outsourcing in the past. Our results for 2000–2014 show a more nuanced picture of carbon leakage during the Kyoto Protocol than previous studies have reported. Carbon outsourcing from developed to developing countries was dominated by the USA outsourcing to China, while the evidence for other developed countries was mixed. Against conventional wisdom, we find that, in general, countries that stayed committed to their Kyoto Protocol emission targets were either only minor carbon outsourcers or actually even insourcers—although the trend was slightly negative—indicating that binding emissions targets do not necessarily lead to carbon outsourcing. We argue that multiple carbon monitoring approaches are needed to reduce the risk of carbon leakage. [ABSTRACT FROM AUTHOR]

This paper quantifies the carbon emissions embodied in the bilateral trade between India from the non-Annex-I country list under the Kyoto Protocol (1997) with two of its biggest trade partners from the Annex-II country list, the USA and the UK, by applying the input–output modelling during the years of 2011 to 2014, to evaluate and analyse the conjecture around the carbon leakage. After the calculation of the embodied carbon in these bilateral exports and imports, the study further inspects the roles of important drivers those are influencing the calculated emission imbalances in trade. This study addresses a high emission-intensive energy consumption pattern of India relative to both the USA and the UK which is confirming the possibility of carbon leakage from Indian commodity production sectors and inducing a huge contribution from these bilateral trades into the global emissions. Finally, this study provides evidence from a spatial decomposition analysis that the differences among the emission-intensity of output between India and its major developed country trade partners create the maximum impact on the implied emission imbalances in the bilateral trades. With the anticipation of increased India–USA and the India–UK bilateral trade, this study proposes suggestion to reduce India's emission intensity of output through fuel switching to the less emission-intensive energy options and relieve the pressure on the global environment. [ABSTRACT FROM AUTHOR]

Relocating energy-intensive industries to another country may help to meet national greenhouse gas reduction targets. However, this can lead to rising global emissions if production in the country that receives the shifted industries is associated with higher specific emissions ("carbon leakage"). The relocation of industries and thus the possible emergence of carbon leakage depends largely on cost advantages in the country of destination and the level of transport costs. In this study, we consider the example of relocations in the iron and steel industries of China and Germany in order to ascertain effects on CO2-emissions. We develop different scenarios for 2030 using a multilevel cross-impact-balance (CIB) approach and analyse these scenarios in a technology-based cost model. Since all scenarios show high specific cost for reducing global CO2-emissions by preferring crude steel produced in Germany to steel from China, we conclude that avoiding carbon leakage is not necessarily a cost-efficient measure for reducing global CO2-emissions. [ABSTRACT FROM AUTHOR]

This paper empirically measures the impact of sectoral energy price differential between trading partners on Indian exports. Using dynamic gravity model, we estimate the response of Indian exports for 11 energy-intensive sectors to sectoral-level energy price asymmetry. We observe the absence of the contemporaneous effect of energy price differential on Indian exports, but the presence of persistence effects. We find that a 10% increase in relative energy prices negatively affects Indian sectoral exports by about 1% ranging from 0.9% for chemicals to 1.4% for non-ferrous metals, revealing a larger impact for energy-intensive sectors. These small effects imply that the concerns of carbon leakage are largely overplayed. [ABSTRACT FROM AUTHOR]

Unilateral actions to reduce CO2 emissions could lead to carbon leakage such as relocation of emission-intensive and trade-exposed industries (EITE). To mitigate such leakage, countries often supplement an emissions trading system (ETS) with free allocation of allowances to exposed industries, e.g. in the form of output-based allocation (OBA). This paper examines the welfare effects of supplementing OBA with a consumption tax on EITE goods. In particular, we investigate the case when only a subset of countries involved in a joint ETS introduces such a tax. The analytical results suggest that the consumption tax would have unambiguously global welfare improving effects, and have welfare improving effects for the tax introducing country as well unless there are strong unfavorable terms-of-trade effects. Numerical simulations in the context of the EU ETS support the analytical findings, including that the consumption tax is welfare improving for the single country that implements the tax. [ABSTRACT FROM AUTHOR]

A country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives. We argue that the strategic component is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory of border adjustments to neutralize the strategic incentive, and consider the remaining environmental incentive in a simplified structure. The theory supports border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions. The theoretic intuition is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law. [ABSTRACT FROM AUTHOR]

This study presents estimates of the magnitude of carbon leakage as a consequence of emission reduction commitments under the Kyoto Protocol using gravity model-style regression analysis on data from the WIOD project. The carbon trade balance between 2002 and 2009 was reduced by 705 megatons of carbon dioxide due to Kyoto and carbon leakage amounts to slightly above 4% of traded carbon dioxide emissions. We highlight four previously neglected issues: First, we control for multilateral trade resistance in the estimation of a unilateral policy by using a two-stage procedure. Second, we control explicitly for the effect of Eastern European countries on leakage estimates. We show that this country group strongly affects the baseline estimates in the framework introduced by Aichele and Felbermayr (Rev Econ Stat 97(1):104–115, 2015). Third, we introduce an alternative specification of the Kyoto variable. Fourth, this is the first study to present econometric evidence for the magnitude of carbon leakage from services sectors. While service elasticities are estimated to be sizable, strong leakage is limited to transport sectors as well as renting of machinery. The manufacturing sectors of metals, machinery and transport equipment are responsible for three quarters of observed leakage. [ABSTRACT FROM AUTHOR]

We consider a two-country model of price competition, with one polluting firm in each country and differentiated products. Assuming away, to simplify, abatement efforts and input substitution, we compare the impact on output, leakages, and trade volumes of a carbon tax versus an emission standard policy, unilaterally enacted by the home country. Under the tax the two firms set their prices simultaneously, in a Bertrand game. Under the standard the home firm's price is conditioned on the price of the foreign firm, so as to abide the emission constraint. As a result, the tax leads to higher leakages and global emissions than the standard. The standard also implies a better trade balance for the home country than the tax. [ABSTRACT FROM AUTHOR]

In recent years, accounting for greenhouse gas emissions due to national consumption has been of increasing interest, as transformative strategies towards a "low-carbon" economy are inevitable to restrict climate change below 2 °C temperature increase. Thus, every country has to implement effective measures to reduce its greenhouse gas emissions at global level by including impacts abroad due to international trade and avoiding the outsourcing of emissions ("carbon leakage"). The sources and origins of emissions should be known to elaborate appropriate emission reduction strategies, requiring a detailed investigation of products in consumption. This article aims at investigating whether an accounting of emissions due to national consumption of products is considered as important and feasible with current methods, what future research gaps are, and how they can be solved by presenting new methodical approaches in the form of life cycle-based physical supply chains. The results have shown that existing methods are based mainly on monetary data at sectoral level, so that a detailed analysis of the national consumption of products is still missing and global effects as "carbon leakage" cannot be identified. Nevertheless, the demand for calculating consumption-based greenhouse gas emissions at product level was confirmed in various studies, but is currently seen as too complex and time-consuming. Finally, proposed methodical solutions to address existing research gaps were elaborated and applied exemplarily for the mineral sector in Austria and shall further serve as a kind of guidance how an accounting of emissions due to national consumption of products can be put in practice. [ABSTRACT FROM AUTHOR]

A number of researchers have found that imports by pollution heavy industries do not increase in response to tighter pollution policy. We empirically evaluate the impact of an sudden and unexpected increase in Swedish electricity prices in the 2000s on the imports of intermediate inputs by Swedish manufacturers. We find that imports declined as domestic electricity prices rose for firms with the most electricity-intense in-house production. We rationalize these findings by developing a simple model of trade in intermediate inputs, which illustrates that energy-intense firms may decrease imports if it is sufficiently difficult to substitute between domestic- and foreign-sourced inputs as domestic energy prices rise. The offshoring mechanism which we identify can help to reconcile conflicting empirical results in the carbon leakage and pollution haven literature, and also has implications for determining the extent to which energy intense trade-exposed sectors should be exempt from domestic climate change policy. [ABSTRACT FROM AUTHOR]

Given the ambiguous empirical results of previous research, this paper tests whether support for a climate policy-induced pollution haven effect and the pollution haven hypothesis can be found. Unlike the majority of previous studies, the analysis is based on international panel data and includes several methodological novelties: By arguing that trade flows of dirty goods to less dirty sectors may also be influenced by changes in policy stringency, trade information on primary, secondary, and tertiary sectors are included. In order to clearly differentiate between dirty sectors and sectors with high pollution abatement costs, separate measures for pollution intensity and policy stringency are implemented. For the former, two intensities, namely the sectors’ carbon dioxide emission intensity and the emission relevant energy intensity, are used to identify dirty sectors. For the latter, an internationally comparable, sector-specific measure of climate policy stringency is derived by applying a shadow price approach. Potential endogeneity between climate policy stringency, trade openness and the trade balance is controlled for by employing a dynamic panel generalized method of moments estimator. The results provide evidence for a pollution haven effect that is also present for non-dirty sectors, i.e., a sector’s net imports rise in general if the sector faces an increase in climate policy stringency. Moreover, a stronger pollution haven effect regarding carbon dioxide intensive and emission relevant energy-intensive sectors is revealed. However, no support for the stronger pollution haven hypothesis can be found. [ABSTRACT FROM AUTHOR]

Electricity costs are partly driven by environmental policy choices. In this paper, the effects of variations in electricity costs-as measured by end-user electricity prices-on firm relocation decisions are investigated. Using a discrete choice model and a data base that has not previously been exploited to study this problem, we investigate the effects of variations in electricity costs on the intensive and extensive re-location decisions of European firms. We find that electricity costs play a significant role in determining relocation destinations. This effect is asymmetric between firms moving into and out of a country, and between high and low energy intensity sectors. The findings of the paper have implications for the Pollution Havens Hypothesis, since they show the extent to which the effects of climate policy on domestic electricity costs can be expected to impact on firm relocation decisions both into and out of a country. [ABSTRACT FROM AUTHOR]

In the absence of a global agreement to reduce emissions, Australia adopted a carbon tax unilaterally to curb its own emissions. During the debate prior to passing the carbon tax legislation in 2011, there were concerns about the challenge that Australia's emissions-intensive and trade-exposed (EITE) industries may face in terms of decreasing international competitiveness due to the unilateral nature of the tax and hence the potential for carbon leakage. In order to address these concerns, this paper explores possible border adjustment measures (BAMs) to complement the domestic carbon regulation in Australia using the multi-sector computable general equilibrium approach. We consider four border adjustments: border adjustments on imports based on domestic emissions; border adjustments on exports via a rebate for exports; a domestic production rebate; and full border adjustment on both exports and imports. We compare the numerical simulation results of these scenarios with a no border adjustments scenario from the standpoint of welfare, international competitiveness and carbon leakage. The key finding is that BAMs have a very small impact on the overall economy and on EITE sectors. In other words, the different BAMs have minimal impact on the outcomes of carbon pricing policy. This finding is consistent with studies for EU, USA, Canada and other countries. Hence, we conclude that the border adjustments are ineffective instruments to safeguard EITE industries in Australia. [ABSTRACT FROM AUTHOR]

The Intergovernmental Panel on Climate Change quantified a cumulative remaining carbon budget beyond which there is a high likelihood global average temperatures will increase more than 2 °C above preindustrial temperature. While there is global participation in mitigation efforts, there is little global collaboration to cooperatively mitigate emissions. Instead, countries have been acting as individual agents with independent emission reduction objectives. However, such asymmetric unilateral climate policies create the opportunity for carbon leakage resulting from the shift in embodied carbon emissions within trade networks. In this analysis, we use an optimization-based model of the global crude trade as a case study to demonstrate the importance of a cooperative, system-level approach to climate policy in order to most effectively, efficiently, and equitably achieve carbon mitigation objectives. To do this, we first characterize the cost and life cycle greenhouse gas emissions associated with the 2014 crude production and consumption system by aggregating multiple data sources and developing a balanced trade matrix. We then optimize this network to demonstrate the potential for carbon mitigation through more efficient use of crude resources. Finally, we implement a global carbon cap on total annual crude emissions. We find that such a cap would require crude consumption to drop from 4.2 gigatons (Gt) to 1.1 Gt. However, if each country had an individual carbon allocation in addition to the global cap consistent with the nationally determined contribution limits resulting from the 2015 United Nations Climate Change Conference, allowable consumption would further decrease to approximately 770 million metric tonnes. Additionally, the carbon accounting method used to assign responsibility for embodied carbon emissions associated with the traded crude further influences allowable production and consumption for each country. The simplified model presented here highlights how global cooperation and a system-level cooperative approach could guide climate policy efforts to be more cost effective and equitable, while reducing the leakage potential resulting from shifting trade patterns of embodied carbon emissions. Additionally, it demonstrates how the spatial distribution of crude consumption and production patterns change under a global carbon cap given various carbon accounting strategies. [ABSTRACT FROM AUTHOR]

The economics of climate change is an active field of research. The contributions to a Special Issue are put in context of the literature, and it is suggested that second-best issues such as carbon leakage and the Green Paradox need to be complemented with a political economy analysis of why certain instruments are politically infeasible and with intra- and intergenerational analyses of the impact of climate policy. A case is also made for more empirical work on the gradual and catastrophic damages of global warming. [ABSTRACT FROM AUTHOR]

The European Union Emissions Trading Scheme (EU ETS) is the world's first large implementation of a $$\hbox {CO}_{2}$$ cap-and-trade system. The possibility that the EU ETS would have adverse effects on sectoral competitiveness is a major concern of policy-makers and industry. This paper analyses whether and to what extent cement and steel industries are exposed to carbon leakage. Prior studies focused on ex-post EU ETS analysis without taking structural breaks into account. Considering this gap in the literature, the present study attempts to provide new empirical evidence on the risk of carbon leakage under the EU ETS. Using rolling cointegration approach, our estimation results reveal that the impact of EU ETS on these two industries varies over time. Indeed, carbon price affects positively the net imports of cement and steel sectors over multiple subperiods, suggesting that these two industries are affected by a negligible carbon leakage and competitiveness losses. However, results reveal that the steel sector is more affected than the cement sector. Policy makers and industry could benefit from the findings of this study that provides a broader understanding of the future role of the EU ETS. [ABSTRACT FROM AUTHOR]

This paper studies greenhouse-gas emission (GHG) controls in the presence of international carbon leakage through international firm relocation. In a new economic geography model with two countries ('North' and 'South'), only North sets a target for GHG emissions. We compare the consequences of emission quotas and emission taxes under trade liberalization on location of two manufacturing sectors with different emission intensities and degrees of carbon leakage. With low trade costs, further trade liberalization increases global emissions by facilitating carbon leakage. Regulation by quotas leads to spatial sorting, resulting in less carbon leakage and less global emissions than regulation by taxes. [ABSTRACT FROM AUTHOR]

We analyse the effects of unilateral climate policy in a two-country two-firm model, with endogenous plant location and heterogeneity in both country size and firm's characteristics. The effectiveness of unilateral climate policy is shown to depend on the joint effect of country and firm heterogeneity, and on their impact on equilibrium location choice. For being effective and not leading to production relocation in the long-run, unilateral climate policy should be moderate, implemented by a sufficiently larger area and complemented by mechanisms promoting the international transfer of clean technologies. The model indicates that the smaller area cannot take the lead in global climate mitigation for a protracted time period. Finally, when the local community is not environmentally concerned, the unilateral policy unambiguously makes the society worse off. [ABSTRACT FROM AUTHOR]

To assess the effect of environmental policy on production structures, trade structures, or foreign direct investment, a measure for the stringency of policy is necessary. Measures typically used in empirical studies share several disadvantages: they are not available on a sectoral basis to reflect concerns of industry competitiveness; they are not available for a wide range of countries to allow for international comparisons; or they are not broad enough to reflect the multidimensionality of environmental policy. This paper develops a thorough, internationally comparable, sector-specific measure of multidimensional climate policy stringency where a shadow price approach serves as a basis. The approach is applied to climate policy by determining sector-specific emission-relevant energy costs on the basis of the sectors' usage of emission-relevant energy carriers and the carriers' respective prices. The resulting shadow price estimates are heterogeneous and can be applied in future research to test for carbon leakage and pollution havens. [ABSTRACT FROM AUTHOR]

The effects of a unilateral cut in emissions are analyzed in a dynamic two-country model. Two (intermediate) goods are produced, one of which uses the fossil fuel. These inputs are traded and combine to produce a final good. The effect of a cut in fossil fuel use by a bloc (e.g. Annexure 1 countries in the Kyoto Protocol) depends on whether the fuel is priced at marginal cost or above. In the latter case a 'green paradox' may appear. The paper's contribution lies in analyzing the dynamics and trade implications of the unilateral action. [ABSTRACT FROM AUTHOR]

Unilateral climate policy can be detrimental to global climate protection. Our objective is to provide insight into such a policy, to quantify the risk of carbon leakage, and to investigate the effects related to potential anti-leakage measures. We analyze existing definitions of carbon leakage and propose an alternative, rigorous one, which is different in three respects. The definition is then tested using computable general equilibrium analysis of the global economy and decomposition analysis. We identify a list of parameters that affect not only the magnitude but also the sign of the carbon leakage rate. Manipulating elasticities of substitution suggests that carbon leakage can be either positive or negative. Computable general equilibrium models, which are widely applied, including by the European Commission in this area, should be transparent, and their assumptions call for careful validation. We find that emission limits are properly distributed between sectors covered by the European Union Emissions Trading System and other sectors for the first commitment period (ended in 2012) but not for the second one (ending in 2020), where the target for the non-trading sectors should be reduced relative to the target for the trading sectors in order to equlize marginal abatement costs. [ABSTRACT FROM AUTHOR]

In recent years, carbon leakage has attracted widespread attention from both environmental researchers and a broader public. Despite its popularity, there has been some confusion around the concept of carbon leakage, resulting from very different and sometimes imprecise definitions of a phenomenon that can be calculated using different, outcome-relevant methods. The aim of the present article is to bring clarity to this research field, to classify available definitions and to offer specific recommendations for good practice. In particular, we discuss and compare different understandings of carbon leakage and the methodologies used to calculate them. Our analysis highlights crucial differences with respect to diverse research purposes and points out shortcomings and potential problems that may, in extreme cases, create policy-relevant grey areas. [ABSTRACT FROM AUTHOR]

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One of the central debates surrounding the design of the European Union Emissions Trading Scheme is the approach to address carbon leakage concerns. Correctly identifying the economic activities exposed to the risk of carbon leakage represents the first step in mitigating the risk effectively. This paper assesses the robustness of the quantitative assessment criteria used by the European Commission for Phase 3. For example we apply the criteria to data for UK and Germany and compare the results with the Commissions' assessment conducted at the aggregated EU level. This reveals that sectors' exposure risk to carbon leakage can vary across different Member States due to differences in production processes, technologies and fuel mix; process emissions; recycling rate differences; product mix differences; sector classification, statistical boundaries, activity allocation differences; and finally difference in data quality. Overall, we find that relative carbon intensity of sectors, measured as cost increase relative to gross value added, provides a robust metric. The analysis also highlights the importance of using high quality and disaggregated data for this assessment. [ABSTRACT FROM AUTHOR]

This paper deals with possible foreign reactions to unilateral carbon demand reducing policies. It differentiates between demand side and supply side reactions as well as between intra- and inter-temporal shifts in greenhouse gas emissions. In our model, we integrate a stock-dependent marginal physical cost of extracting fossil fuels into Eichner and Pethig's (Int Econ Rev 52(3):767-805, ) general equilibrium carbon leakage model. The results are as follows: Under similar but somewhat tighter conditions than those derived by Eichner and Pethig (Int Econ Rev 52(3):767-805, ), a weak green paradox arises. Furthermore, a strong green paradox can arise in our model under supplementary constraints. That means a 'green' policy measure might not only lead to a harmful acceleration of fossil fuel extraction but to an increase in the cumulative climate damages at the same time. In some of these cases there is even a cumulative extraction expansion, which we consider disastrous. [ABSTRACT FROM AUTHOR]

The adoption of domestic emissions trading schemes (ETS) can impose a heavy burden on energy-intensive industries. Particularly, energy-intensive industries competing with foreign competitors could lose their international edge. Although the abatement of CO emissions in industrialized countries entails the reduction of their energy-intensive production, a corresponding increase in the production of energy-intensive goods in countries without CO regulations may lead to carbon 'leakage.' This paper examines the effects of various allocation methods of emissions permits in the Japanese ETS on the economy and CO emissions using a multiregional and multisector computable general equilibrium model. Specifically, we apply the Fischer and Fox (Land Econ 83(4):575-599, ) model to the Japanese economy to address carbon leakage and competitiveness issues. We compare auction schemes, grandfathering schemes, and output-based allocation (OBA) schemes. We further extend the model by examining a combination of auctions and OBA. Though the auction scheme is found to be the best in terms of macroeconomic impacts, the leakage rate is high and the harm to energy-intensive sectors can be significant. OBA causes less leakage and damage to energy-intensive sectors, but the macroeconomic impact is undesirable. Considering all three effects-leakage, competitiveness, and macroeconomics-we find that combinations of auctions and OBA are desirable. [ABSTRACT FROM AUTHOR]

With the third trading period of the EU emissions trading scheme (EU ETS) starting in 2013, the system of allocating emission allowances will significantly change: In contrast to the previous two trading periods, auctioning of the allowances should now be the rule rather than the exception. Accompanying this policy change, concerns over competitiveness of energy intensive, trade exposed sectors as well as over limited environmental effectiveness via the channel of carbon leakage, have regained prominence. In this paper, we thus explore the impacts of potential EU policies to counter losses in international competitiveness and carbon leakage from the perspective of Austria. Based on numerical simulations with a computable general equilibrium model, we evaluate three policy options: an input subsidy for carbon allowances (thus reflecting the planned partially free allocation mechanism in the third EU ETS phase), a subsidy for domestic production, and an export rebate based on sectoral CO costs. Our results show that each policy has the potential to support domestic production in exposed sectors relative to a full auctioning scenario and thus increase competitiveness. However, none is imperatively effective at reducing Austria's net carbon emissions: while the carbon trade balance is improved and hence leakage declines, the tradability of emission permits within the EU ETS allows CO emissions from Austria's ETS output to increase. A cost benefit analysis indicates that the two policies promoting domestic output and exports are more cost effective than the CO input subsidy. [ABSTRACT FROM AUTHOR]

The inception of the emission trading scheme in Europe has contributed to power price increases. Energy intensive industries have reacted by arguing that this may affect their competitiveness and will induce them to leave Europe. Taking up a proposal of these industrial sectors, we explore the possible application of special contracts, where electricity is sold at average generation cost to mitigate the impact of CO2 cost on power prices. The model supposes fixed generation capacities. We first consider a reference model representing a perfectly competitive market where all consumers (industries and the rest of the market) are price-takers and buy electricity at short-run marginal cost. We then change the market design by assuming that energy intensive industries pay power either at a regional or at a zonal average cost price. The analysis is conducted with simulation models applied to the Central Western European power market. The models are implemented in GAMSIPATH. [ABSTRACT FROM AUTHOR]

Using a stylized theoretical model, we argue that current economic analyses of climate policy tend to over-estimate the degree of carbon leakage, as they abstract from the effects of induced technological change. We analyse carbon leakage in a two-country model with directed technical change, where only one of the countries enforces an exogenous cap on emissions. Climate policy induces changes in relative prices, that cause carbon leakage through a terms-of-trade effect. However, these changes in relative prices also affect the incentives to innovate in different sectors. This leads to a counterbalancing induced-technology effect, which always reduces carbon leakage. We therefore conclude that the leakage rates reported in the literature may be too high, as these estimates neglect the effect of price changes on the incentives to innovate. [ABSTRACT FROM AUTHOR]

Rehabilitation of degraded forest land through implementation of carbon-sink projects can increase terrestrial carbon (C) stock. However, carbon emissions outside the project boundary, which is commonly referred to as leakage, may reduce or negate the sequestration benefits. This study assessed leakage from carbon-sink projects that could potentially be implemented in the study area comprised of 11 sub-districts in the Batanghari District, Jambi Province, Sumatra, Indonesia. The study estimates the probability of a given land use/cover being converted into other uses/cover, by applying a logit model. The predictor variables were: proximity to the center of the land use area, distance to transportation channel (road or river), area of agricultural land, unemployment (number of job seekers), job opportunities, population density and income. Leakage was estimated by analyzing with and without carbon-sink projects scenarios. Most of the predictors were estimated as being significant in their contribution to land use cover change. The results of the analysis show that leakage in the study area can be large enough to more than offset the project's carbon sequestration benefits during the period 2002-2012. However, leakage results are very sensitive to changes of carbon density of the land uses in the study area. By reducing C-density of lowland and hill forest by about 10% for the baseline scenario, the leakage becomes positive. Further data collection and refinement is therefore required. Nevertheless, this study has demonstrated that regional analysis is a useful approach to assess leakage. [ABSTRACT FROM AUTHOR]

We analyse games of greenhouse gas emissionreduction in which the emissions and theemission reduction costs of one country dependon other countries' emission abatement. In ananalytically tractable model, we show thatinternational trade effects on costs andemissions can either increase or decreaseincentives to reduce emissions and to cooperateon emission abatement; in some specifications,optimal emission reduction is unaffected bytrade. We therefore specify the model further,calibrating it to larger models that estimatethe costs of emission reduction, trade effects,and impacts of climate change. If trade effectsare driven by total emission reduction costs ofother countries cooperation is slightly moredifficult than in the case without tradeeffects. If trade effects are determined byrelative emission reduction efforts in othercountries, cooperation becomes easier. Carbonleakage does not affect our qualitativeinsights, although it does change thenumbers. [ABSTRACT FROM AUTHOR]

Forests offer good possibilities for the sequestration of carbon dioxide. This service can be commodified by the introduction of carbon (dioxide) credits, which can be traded on a carbon market. The premise of this paper is that the traditional economic view on the construction of these carbon markets is a too simplistic one, particularly, because it neglects the social meaning of a carbon market for developing countries. From their viewpoint as suppliers of carbon credits such a market has a broader meaning. It must be seen as a social mechanism for improving both the living conditions of local people and a more encompassing improvement of the environment than climate as such. What initially might be labelled as a carbon market might better be understood as a more encompassing 'green market'. The agreement between Costa Rica and Norway, officially known as the Reforestation Conservation Activities Implemented Jointly Project (RFCAIJP) represents a clear example of a green market. In this paper, we study the development, characteristics and benefits of that market, asking the question what lessons can be learned from this first practical experiences. More specifically we focus on the conditions that have made this type of agreement successful. [ABSTRACT FROM AUTHOR]

How to stabilize the CO2 concentration in the atmosphere depends crucially on baseline assumptions of future economic growth, energy demand and supply technologies, etc. In this paper we investigate how different assumptions about the future affect the necessary global policy measures to reach specific concentration targets for CO2. This is done by constructing two contrasting baseline scenarios within an intertemporal model of fossil fuel markets. We find that the appropriate CO2 emission and concentration paths for a given concentration target are very dependent on the baseline. Moreover, the impact on oil wealth for OPEC and other oil producers of stabilizing CO2, concentrations depends significantly both on the baseline and on whether the target is reached through carbon taxes or autonomous technological change in carbon-free energy sources. Carbon leakage through changes in international fossil fuel prices is found to be negligible and possibly negative. [ABSTRACT FROM AUTHOR]