Intermediate Input Linkage and Carbon Leakage

33 Pages Posted: 7 Nov 2016

See all articles by Zengkai Zhang

Zengkai Zhang

Tianjin University - College of Management and Economics

ZhongXiang Zhang

Tianjin University - Ma Yinchu School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2016

Abstract

Climate regulations tend to target energy intensive sectors whose products are widely used in industrial production as intermediate inputs, such as electricity, and the carbon abatement may be partially offset by intermediate input-led leakage. This paper aims to examine the impact of intermediate input linkage on the carbon leakage both theoretically and empirically. We develop a Harberger-type model with an input-output linkage structure, identify four leakage effects and derive closed-form solutions for these leakage effects. For empirical simulation, we build a computable general equilibrium model of China’s economy and introduce Structural Decomposition Analysis to link both the theoretical and empirical models. When imposing a carbon price on the electricity generation sector, our results show significant carbon leakage. Our decomposition analysis further suggests that such leakage is mainly through the production substitution effect, followed by the multiplier effect. Both of the two effects are closely related to the intermediate input linkage, and thus shed some light on the importance of considering sectoral linkage when discussing the carbon leakage issue of climate policies.

Keywords: Carbon leakage; sectoral linkage; climate regulation; general equilibrium model; production substitution effect; multiplier effect

JEL Classification: Q55; Q58; Q43; Q48; O13; O31; O33; O44; F18

Suggested Citation

Zhang, Zengkai and Zhang, ZhongXiang, Intermediate Input Linkage and Carbon Leakage (September 7, 2016). CCEP Working Paper 1606, Crawford School of Public Policy, the Australian National University. Available at SSRN: https://ssrn.com/abstract=2866067 or http://dx.doi.org/10.2139/ssrn.2866067

Zengkai Zhang

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

ZhongXiang Zhang (Contact Author)

Tianjin University - Ma Yinchu School of Economics ( email )

92 Weijin Road, Nankai District
Tianjin 300072
China
+86 22 87370560 (Phone)

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