Carbon Leakage

Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.

Carbon leakage may occur for a number of reasons:

• if the emissions policy of a country raises local costs, then another country with a more relaxed policy may have a trading advantage. If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced.
• if environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall. Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit.

There is no consensus over the magnitude of long-term leakage effects (Goldemberg et al., 1996, p. 31). This is important for the problem of climate change, which covers long time periods.

Carbon leakage does not necessarily imply that the increased emissions are from competing companies; climate policies may have the effect of causing companies to relocate its production to countries without a climate policy in order to take advantage of the economic benefits.

On most occasions, leakage is understood as having negative effects in terms of emissions increasing outside of domestic emission reduction policies. However, effects of leakage may be positive, leading to reductions in emissions outside of the emission reduction policy area. For example, emission reductions policy might lead to technological developments that aid reductions outside of the policy area (Barker et al., 2007). These effects are commonly called spill-over (IPCC, 2007).

One measure of carbon leakage is the balance of emissions embodied in trade (BEET).