Revisiting carbon leakage

Abstract

This paper estimates empirically carbon leakage rates that can result from unilateral carbon pricing policies. While carbon leakage is a key parameter in international climate policy discussions, including in the current debate on border carbon adjustment, it remains subject to significant uncertainty. We propose innovations along two lines. First, we exploit recently published panel data on country-and-sector-specific changes in effective energy prices to identify changes in domestic carbon emissions and other flows. This is in contrast to previous studies that have used historically limited variation in carbon prices or adherence to international climate agreements. Second, we present a simple accounting framework to derive short-term carbon leakage rates from unilateral policies using reduced-form elasticity estimates, thereby making our results more 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 that changes in domestic energy prices have sizeable effects on exports of embodied carbon, but not on imports.