Carbon Leakage in a World of Asymmetric Carbon Prices: Evidence from Emissions Embodied in Trade and Effective Carbon Prices

Abstract

Although climate change is a global challenge, countries are still making efforts through unilateral climate policies. This raises concerns about carbon leakage, where the emissions reduced in the abating countries are offset by those increased in the unregulated countries, undermining the efficacy of climate policies. In a world of asymmetric carbon prices and an era of global value chains, it is critical to investigate the scale and mechanism of carbon leakage to examine the mitigation effects of climate policies. In this study, we use bilateral carbon emissions embodied in trade dataset and effective carbon price database to examine the impact of asymmetric carbon prices on emissions embodied in global value chains. The results show that a $1 discrepancy in carbon prices between the consuming and producing countries translates to a 0.13%-0.27% rise in the emissions of the producing nation. Carbon leakage can also be found in the service sector. In addition, the magnitude of carbon leakage might expand in the future when the carbon price gap increases. The findings of this study show that nations need to initiate negotiations to improve global cooperation in order to avoid carbon leakage and combat global climate change effectively.

Keywords: Carbon leakage, Effective carbon prices, Emissions embodied in trade, Global value chains