Carbon leakage is a concept to quantify an increase ingreenhouse gas emissions in one country as a result of anemissions reduction by a second country with stricterclimate change mitigation policies.[1][2] Carbon leakage is one type ofspill-over effect. Spill-over effects can be positive or negative;[3] for example, emission reductions policy might lead to technological developments that aid reductions outside of the policy area. Carbon leakage can be defined as "the increase inCO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries."[4] It is expressed as a percentage, and can be greater or less than 100%. There is no consensus over the magnitude of long-term leakage effects.[5]
Carbon leakage may occur for a number of reasons: if the climate policies of a country raise local costs, then another country with more relaxed policies may have a trading advantage. If demand for these goods remains the same, production maymove offshore to the cheaper country with lower standards, and global emissions will not be reduced. Moreover, if environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall. Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit. In the case of transboundary economic activities such as maritime transport, carbon leakage can take various forms—for example, ships may call at intermediate ports to circumvent climate regulations or increase their sailing speed outside regulated zones, resulting in higher overall emissions.[6]
The issue of carbon leakage can be interpreted from the perspective of the reliance of society on coal, oil, and alternative (less polluting) technologies, e.g.,biomass. This is based on the theory of nonrenewable resources.[5] The potential emissions from coal, oil and gas is limited by the supply of these nonrenewable resources. To a first approximation, the total emissions from oil and gas is fixed,[clarification needed] and the total load of carbon in the atmosphere is primarily determined by coal usage.
A policy that sets acarbon tax only in developed countries might lead to leakage of emissions to developing countries. However, a negative leakage (i.e., leakage having the effect of reducing emissions) could also occur due to a lowering in demand and price for oil and gas. One of the negative effects of carbon leakage is the undermining of global emissions reduction efforts. When industries relocate to countries with lower emission standards, it can lead to increased greenhouse gas emissions in those countries.
This might lead coal-rich countries to use less coal and more oil and gas, thus lowering their emissions.[5] While this is of short-term benefit, it reduces the insurance provided by limiting the consumption of oil and gas. The insurance is against the possibility of delayed arrival of backstop technologies. If the arrival of alternative technologies is delayed, the replacement of coal by oil and gas might have no long-term benefit. If the alternative technology arrives earlier, then the issue of substitution becomes unimportant. In terms of climate policy, the issue of substitution means that long-term leakage needs to be considered, and not just short-term leakage.[5]By taking into account the potential delays in alternative technologies and wider substitution effects, policymakers can develop strategies that minimize leakage and promote sustainable emissions reduction. Leakage can also be reduced if climate-concerned countries "buy coal", i.e., the right to extract fossil fuels, in other countries.
Estimates of leakage rates for action under theKyoto Protocol ranged from 5 to 20% as a result of a loss in price competitiveness, but these leakage rates were viewed as being very uncertain.[7] For energy-intensive industries, the beneficial effects of Annex I actions through technological development were viewed as possibly being substantial. This beneficial effect, however, had not been reliably quantified. On the empirical evidence they assessed, Barkeret al. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., theEU ETS, were not significant.
The European Union hands out free EU ETS certificates (EU allowances) to sectors with high risk of carbon leakage, e.g., aluminium.[8][9] It uses the Carbon Leakage Indicator (CLI) to determine sectors at risk of carbon leakage, with the formula.
,
where isgross value added.[10]
Recent North American emissions schemes such as theRegional Greenhouse Gas Initiative and theWestern Climate Initiative are looking at ways of measuring and equalising the price of energy 'imports' that enter their trading region[11]
Carbon leakage policies often fail not because the math is wrong, but because trading partners fight back. This edit explainswho fights back andhow they might do it (e.g., targeting farmers instead of steel mills), using the specific data from the paper regarding Russia, Turkey, and the US.[12] While border adjustment mechanisms are theoretically designed to neutralize carbon leakage by leveling the playing field, their practical implementation is complicated by the high risk of trade retaliation.[12] Research published in Energy Policy (2022) indicates that the introduction of such mechanisms, specifically the EU's CBAM, is likely to trigger significant opposition from trading partners with high "carbon intensity" and export dependence.[12]
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