Revisiting Carbon Leakage

Abstract

This paper estimates the carbon leakage rate across countries, arguably a key parameter in international climate policy discussions including on border carbon adjustment, but which remains subject to significant uncertainty. We propose innovations along two lines. First, we exploit recently published data on sector-country-specific changes in effective energy prices to identify changes in domestic carbon emissions and other flows (rather than the historically limited variation in carbon prices or adherence to international climate agreements). Second, we present a simple accounting framework to derive carbon leakage rates using reduced-form regressions in contrast to existing papers, thereby making our results directly comparable to model-based estimates of carbon leakage. We show that carbon leakage rates differ across countries and could be larger than what existing estimates suggest. We also find asymmetric effects of higher energy prices, with a larger impact on exports compared to imports of embodied carbon.

Keywords: carbon leakage, CO2 content of trade, emission spillovers, competitiveness