Abstract
Carbon leakage is the effect of emissions transferring to certain countries due to others having a stricter climate policy. This phenomenon is shown to have undercut the effectiveness of the Kyoto Protocol. Considering the increasingly globalised nature of the world economy, carbon leakage may have an even greater potential under the Paris Agreement some 15 years later. Although a more global approach to combatting climate change, the Paris Agreement is susceptible to leakage because of its lack of policy harmonization and enforcement mechanisms. Here, we perform the first quantitative analysis of the potential for carbon leakage under Paris, using the GTAP-E general equilibrium model of the world economy with energy and carbon emissions to analyse leakage effects under six scenarios. Two of these scenarios analyse regions implementing climate policy in isolation, two greater participation, but still not harmonized, global Paris Agreement policy, and a further two analyse the effect of a US withdrawal from the agreement. Both cases are considered with and without the US withdrawal. Our analysis demonstrates that there is potential for significant carbon leakage effects, in line with the rates produced from studies on the Kyoto Protocol. Depending on model elasticities, we find medium carbon leakage in the range of 1–9% (with a central estimate of 3–4%) under co-ordinated Paris Agreement policy across countries, compared to high leakage of 8–31% when countries operate in isolation. However, scenarios where the USA withdraws from the agreement result in roughly doubling of leakage rates, in the range of 3–16% (central estimate 7%), which demonstrates the vulnerability of the Paris Agreement in its current form. To limit leakage effects, greater policy co-ordination to achieve consistent implicit carbon prices is needed across countries.
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Notes
As of 1 January 2020, the Emission Trading Scheme also includes Switzerland, but this is not included in the analysis as Switzerland is not treated as an individual region. The impact would anyway not be large enough to significantly influence the results.
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This research was funded through financial support from the Spanish Ministry of Science, Innovation and Universities, through the ‘María de Maeztu’ program for Units of Excellence (MDM-2015-0552), and from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme through an ERC Advanced Grant (grant agreement no. 741 087). The authors thank Stefan Drews for useful comments.
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King, L.C., van den Bergh, J.C.J.M. Potential carbon leakage under the Paris Agreement. Climatic Change 165, 52 (2021). https://doi.org/10.1007/s10584-021-03082-4
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DOI: https://doi.org/10.1007/s10584-021-03082-4