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Carbon Pricing, Growth and the Environment

Carbon Pricing, Growth and the Environment

Critical Issues in Environmental Taxation series

Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor

The emphasis of the book lies in finding critical solutions to global climate change including chapters on environmental fiscal reform and unemployment in Spain, EU structural and cohesion policy and sustainable development, ecological tax reform in Europe and Asia, Australia’s carbon pricing mechanism, and many other timely topics.

Chapter 16: Is carbon leakage really low? A critical reconsideration of the leakage concept

Florian Habermacher

Subjects: economics and finance, environmental economics, public finance, environment, climate change, environmental economics, law - academic, tax law and fiscal policy


Currently, and likely in the near future, climate policies are regional rather than global. That is, they may cover emissions from a single country (unilateral policy) or from a coalition of countries (regional policy), but substantial agreements to include all countries in the world seem politically infeasible at the present time. Regionally constrained efforts to protect the climate through emission reductions are likely to be undermined by so- called carbon leakage, defined as the part of emission reductions in the region imposing a climate policy that is offset by an increase of emissions in the unconstrained regions above their baseline levels.1 In other words, carbon leakage implies that parts of regional fossil fuel- emission reductions may be compensated by increased emissions elsewhere in the world. This happens through two main channels (e.g. Felder and Rutherford, 1993; Burniaux and Oliveira- Martins, 2012). First, the domestic fuel demand reduction implies that, for a given worldwide fuel supply, the fuel price on the global market will decrease, leading to a larger consumption of the fuel in the remainder of the world (the energy market channel).2 Second, in the absence of border tax adjustments, parts of the regional emission reductions may simply stem from a relocation of domestic energy- intensive production industries abroad, while the end consumption of the final products may hardly be affected, and emissions from producing them thus remain fairly constant worldwide (the non- energy market channel).

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