Carbon leakage

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Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.

Carbon leakage may occur for a number of reasons:

  • if the emissions policy of a country raises local costs, then another country with a more relaxed policy may have a trading advantage. If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced.
  • 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.

There is no consensus over the magnitude of long-term leakage effects.[1] This is important for the problem of climate change, which covers long time periods.

Carbon leakage does not necessarily imply that the increased emissions are from competing companies; climate policies may have the effect of causing companies to relocate its production to countries without a climate policy in order to take advantage of the economic benefits.

On most occasions, leakage is understood as having negative effects in terms of emissions increasing outside of domestic emission reduction policies. However, effects of leakage may be positive, leading to reductions in emissions outside of the emission reduction policy area. For example, emission reductions policy might lead to technological developments that aid reductions outside of the policy area (Barker et al., 2007).[2] These effects are commonly called spill-over (IPCC, 2007).[3]

One measure of carbon leakage is the balance of emissions embodied in trade (BEET).[4][clarification needed (how is this related to carbon leakage?)]

Coal, oil and "backstop" technologies[edit]

The issue of carbon leakage can be interpreted from the perspective of the reliance of society on coal, oil, and "backstop" (less polluting) technologies, e.g., biomass. This is based on the theory of nonrenewable resources (Goldemberg et al., 1996, pp. 27-28).[1] 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, and the total load of carbon in the atmosphere is determined by coal usage.

A policy that, for example, sets a carbon 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. This might lead coal-rich countries to use less coal and more oil and gas, thus lowering their emissions (Goldemberg et al., 1996, pp. 27-28).[1] 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 backstop technologies is delayed, the substitution of coal for oil and gas might have no long-term benefit. If the backstop 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 (Goldemberg et al., 1996, p. 28).

Current schemes[edit]

Barker et al. (2007) assessed the literature on spillover effects and carbon leakage. They defined carbon leakage as the increase in CO2 emissions outside of the countries taking domestic mitigation action, divided by the reduction in emissions of countries taking domestic mitigation action.[2] Accordingly, a leakage rate greater than 100% would mean that domestic actions to reduce emissions had had the effect of increasing emissions in other countries to a greater extent, i.e., domestic mitigation action had actually led to an increase in global emissions.

Estimates of leakage rates for action under the Kyoto 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.[5] 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, Barker et al. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., the EU ETS, were not significant.

Recent North American emissions schemes such as the Regional Greenhouse Gas Initiative and the Western Climate Initiative are looking at ways of measuring and equalising the price of energy 'imports' that enter their trading region[6]

See also[edit]

Notes[edit]

  1. ^ a b c Goldemberg, J. et al. (1996). J.P. Bruce et al. (Eds)., ed. Introduction: scope of the assessment. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change (PDF). This version: Printed by Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. PDF version: IPCC website. doi:10.2277/0521568544. ISBN 978-0-521-56854-8. 
  2. ^ a b Barker, T. et al. (2007), B. Metz et al. (Eds.), ed., 11.7.2 Carbon leakage. In (book chapter): Mitigation from a cross-sectoral perspective. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website, retrieved 2010-04-05 
  3. ^ IPCC (2007), B. Metz et al. (Eds.), ed., Glossary A-D. In (section): Annex I. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A., retrieved 2010-04-18 
  4. ^ Jiahua Pan, Jonathan Phillips, and Ying Chen, China’s balance of emissions embodied in trade: approaches to measurement and allocating international responsibility, Oxford Review of Economic Policy, Volume 24, Number 2, 2008, pp.354–376
  5. ^ Barker, T. et al. (2007), B. Metz et al. (Eds.), ed., Executive Summary. In (book chapter): Mitigation from a cross-sectoral perspective. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website, retrieved 2010-04-05 
  6. ^ RGGI Imports and Emissions Leakage Working Group

Further reading[edit]