Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor
Chapter 16: Is carbon leakage really low? A critical reconsideration of the leakage concept
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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