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Carbon leakage: pollution, trade or politics?

Abstract

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.

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Fig. 1
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Notes

  1. 1.

    Readers interested in CL from forest conservation are asked to consult e.g. Henders and Ostwald (2012), Schwarze et al. (2002), Meyfroidt and Lambin (2009) and Karstensen et al. (2013).

  2. 2.

    When using the above notation of CL, the assumption of falling emissions under mitigation policy becomes crucial because negative values of CL could also result theoretically from a situation where the emission level rises both in the mitigating and non-mitigating country.

  3. 3.

    Note that variations to the standard CL concept appeared in the literature after the publication of AR4 in 2007.

  4. 4.

    Standard (policy-induced or ‘strong’) CL occurs mainly through two channels: energy (driven by changes in fossil-fuel prices) and non-energy markets (due to production and competitiveness issues) (Böhringer et al. 2012).

  5. 5.

    Goodspeed (2006) investigated the frequency of using tax exemption or tax reliefs in developing and OECD countries. His studies showed that both types of tax incentives were more frequently used in developing than in developed countries.

  6. 6.

    Note that this is a discrete analogue of differential. In this case, the derivative equals 0 (respectively is non-negative, respectively is non-positive) if and only if the function is constant (respectively weakly increasing, respectively weakly decreasing).

  7. 7.

    As one of our Reviewers remarked, the static approach could theoretically be applied also to ‘strong’ CL studies as well.

  8. 8.

    Most empirical studies admit that a few carbon-intensive industries that usually have weak innovation potential may face some competitiveness issues upon imposition of carbon regulation. They should not, however, be sufficient to relocate the production lines abroad.

  9. 9.

    Note that in the case of sectoral CL (‘strong’ CL definition applied not at the national, but at the sectoral level) production and competitiveness channel play a more important role than in the global economy CL (Kuik and Hofkes 2010).

  10. 10.

    Turner et al. (2012) consider a specific situation where one of the UK manufacturing sectors experiences a 10 % increase in imports from other countries. However, the change in the system setting could also be an introduction of a climate policy, so that this methodology could be used to investigate ‘strong’ CL.

  11. 11.

    The study is based on the GTAP dataset consisting of 133 regions and 57 sectors.

  12. 12.

    In order to illustrate these emission volumes, let us note that a 250 MW coal-fired power plant with at least 8,000 operating hours per year emits about 1.7 Mt of \(\hbox {CO}_{2}\) annually and that 1.8 Mt of \(\hbox {CO}_{2}\) a year is emitted by a typical steel producer for each 1 Mt of produced steel (Climate Strategy Group).

  13. 13.

    Peters et al. (2011a) tried to approximate the missing years by developing the so-called TSTRD method that allowed them to construct data time series. However, these estimates are reported to be significantly more uncertain than the available point data.

  14. 14.

    Hummels et al. (2001) note that the volume of international trade has outpaced the total production output. This indicates that companies often ‘outsource’ the production of certain inputs to other countries, where they can be produced more cheaply. The imported parts are then included in the final goods and exported to final destination markets—a phenomenon called vertical specialization or outsourcing.

  15. 15.

    An official definition of BTA used by OECD and GATT Working Party on BTA along with a discussion of it can be found in Demaret and Stewardson (1994): ‘any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products’.

  16. 16.

    The Armington elasticity formula consists of two layers: the first one measures the effect of substitution between home and international goods while the second one investigates substitution within a basket of imported goods only.

  17. 17.

    Note that emissions embedded in trade were calculated using the EEBT method. If they were to be calculated using the MRIO model, the outcome and thus ‘weak’ CL estimate would most probably be higher (Peters and Hertwich 2008).

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Acknowledgments

We would like to thank Glen Peters, Edgar Hertwich and Kirsten Wiebe for insightful information and comments.

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Correspondence to Gabriela Michalek.

Appendices

Appendix 1: Definitions of CL by the IPCC

  1. [1]

    ‘The increase in \(\hbox {CO}_{2}\) emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries’.

    IPCC AR4, Climate Change 2007: Working Group III: Mitigation of Climate Change, Chapter 11.7.2.

  2. [2]

    ‘The part of emissions reductions in Annex-B countries that may be offset by an increase of the emissions in the non-constrained countries above their baseline levels. This can occur through (1) relocation of energy-intensive production in non-constrained regions; (2) increased consumption of fossil fuels in these regions through decline in the international price of oil and gas triggered by lower demand for these energies; and (3) changes in incomes (thus in energy demand) because of better terms of trade.’

    IPCC AR4, Climate Change 2007: Working Group III: Mitigation of Climate Change, Annex I, Glossary.

  3. [3]

    ‘CL refers to the phenomena whereby the reduction in emissions (relative to a benchmark) are offset by an increase outside the jurisdiction (Peters and Hertwich 2008; Barrett et al. 2013). Leakage can occur at a number of levels, be it a project, state, province, nation or world region. This can occur through:

    1. (A)

      Changes in relative prices whereby national regulation reduces demand for fossil fuels, thereby causing fall in world prices resulting in an increase in demand outside the jurisdiction

    2. (B)

      Relocation of industry where a firm relocates their operation to another nation due to less favourable financial benefits in the original jurisdiction brought about by the reduction measures

    3. (C)

      Nested regulation where, for example, the European Union imposes an aggregate cap on emissions meaning that the efforts of individual countries exceed the cap freeing up allowance in other country under the scheme

    4. (D)

      Weak consumption leakage describes the increase of emissions in one country as a consequence of actions or policies that are unrelated to climate policy (such as changed quantity or composition of imports) in another country’

    IPCC AR5, Climate Change 2014: Working Group III: Mitigation of Climate Change, Chapter 5.4, Box 5.4.

  4. [4]

    ‘Phenomena whereby the reduction in emissions (relative to a baseline) in a jurisdiction/sector associated with the implementation of mitigation policy is offset to some degree by an increase outside the jurisdiction/sector through induced changes in consumption, production, prices, land use and trade across the jurisdictions/sectors. Leakage can occur at a number of levels, be it a project, state, province, nation, or world region. See also Rebound effect.’

    IPCC AR5, Climate Change 2014: Working Group III: Mitigation of Climate Change, Annex I, Glossary.

Appendix 2: Overview of CL definitions

Table 1 Different definitions of leakage (and related concepts) in the literature

Remark

"Hypothetical" refers to the scenario that would have occurred if the carbon policy under study had not been introduced.

Appendix 3: Comparison of MRIO and EEBT estimates

Table 2 MRIO and EEBT estimates of emissions embedded in trade and global emissions in 1997, 2001 and 2004

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Michalek, G., Schwarze, R. Carbon leakage: pollution, trade or politics?. Environ Dev Sustain 17, 1471–1492 (2015). https://doi.org/10.1007/s10668-014-9616-8

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Keywords

  • Carbon leakage
  • Environmental policy
  • Emission transfers
  • Multi-regional input–output analysis (MRIO)
  • Emissions embodied in bilateral trade (EEBT)