Mitigating Emissions Leakage in Incomplete Carbon Markets
Abstract
Policies regulating greenhouse gas emissions apply to a small subset of emitting sources. This raises a formidable concern: emissions can “leak” from regulated to unregulated sources. We provide a theoretical basis for deriving industry-specific measures of leakage risk and for calibrating the output-based subsidies that are currently used to mitigate leakage. Using US energy price variation as a proxy for variation that would be induced by a domestic carbon price, we show how theoretically consistent leakage-mitigating subsidies can be calibrated. We simulate the impacts of a domestic carbon price on US manufacturing with and without these subsidies. Absent mitigation, emissions leakage is substantial. Output-based subsidies targeted on the basis of our leakage risk measures significantly reduce this leakage risk. In contrast, the current practice of coarsely targeting subsidies on the basis of emissions intensity and trade exposure delivers a small fraction of leakage mitigation benefits while incurring significant costs.
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Sector-specific simulation studies found leakage rates that range from 20% to 70% for the cement, aluminium and steel industries, which suggests that a significant portion of emissions reductions in domestic EITE production could be offset by increased emissions abroad.
“They found leakage rates that range from 20% to 70% for the cement, aluminium and steel industries, which suggests that a significant portion of emissions reductions in domestic EITE production could be offset by increased emissions abroad 27,54,55 .”
From Potential impacts and challenges of border carbon adjustments (2022) · cites this paper as [27]
Leakage risk is ultimately limited to a number of narrow, specific cases.
“Analysis shows that leakage risk varies considerably both across and within sectors, being ultimately limited to a number of narrow, specific cases (37, 44) that are linked mainly to carbon intensity of production ( Figure 4 ) and the inability to fully pass forward CO2 costs to product prices given major trade exposure (24, 45).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [44]
Leakage risk varies considerably both across and within sectors.
“Analysis shows that leakage risk varies considerably both across and within sectors, being ultimately limited to a number of narrow, specific cases (37, 44) that are linked mainly to carbon intensity of production ( Figure 4 ) and the inability to fully pass forward CO2 costs to product prices given major trade exposure (24, 45).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [44]
Cites
The Environmental Bias of Trade Policy*
Shapiro, J. S. (2021) · The Quarterly Journal of Economics · doi:10.1093/qje/qjaa042 · Cited by 259 · see citing works
EU emissions trading and the cement sector: a spatial competition analysis
PONSSARD, J. P., & WALKER, N. (2008) · Climate Policy · doi:10.3763/cpol.2007.0500 · Cited by 132 · see citing works
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Potential impacts and challenges of border carbon adjustments
Böhringer, C., Fischer, C., Rosendahl, K. E., & Rutherford, T. F. (2022) · Nature Climate Change · doi:10.1038/s41558-021-01250-z · Cited by 292 · see citing works
Carbon Leakage, Consumption, and Trade
Grubb, M., Jordan, N. D., Hertwich, E., Neuhoff, K., Das, K., Bandyopadhyay, K. R., van Asselt, H., Sato, M., Wang, R., Pizer, W. A., et al. (2022) · Annual Review of Environment and Resources · doi:10.1146/annurev-environ-120820-053625 · Cited by 176 · see citing works
Does China's regional emission trading scheme lead to carbon leakage? Evidence from conglomerates
He, L.-Y., & Chen, K.-X. (2023) · Energy Policy · doi:10.1016/j.enpol.2023.113481 · Cited by 66 · see citing works
- Authors
- Fowlie, M. L., & Reguant, M.
- ORCID
- Reguant, Mar
- Venue
- Journal of the Association of Environmental and Resource Economists
- Publisher
- University of Chicago Press
- Published
- 2022-03-01
- Volume
- 9
- Issue
- 2
- Pages
- 307-343
- ISSN
- 2333-5955 (ISSN-L)
- 2333-5963
- OpenAlex
- W3194513912
- Cited by
- 75
- References
- 2
- Citations by year
- 2026: 9 · 2025: 18 · 2024: 16 · 2023: 15 · 2022: 7 · 2021: 9 · 2020: 1
- FWCI
- 8.97
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of the Association of Environmental and Resource Economists (publishedVersion)
- eScholarship (California Digital Library) (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Energy, Environment, Economic Growth
- Physical Sciences › Energy › Renewable Energy, Sustainability and the Environment › Energy, Environment, and Transportation Policies
- Keywords
- emissions leakage, leakage risk, carbon pricing, greenhouse gas regulation, manufacturing emissions, energy prices, trade exposure, emission intensity
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