Carbon Leakage

Definition

Carbon leakage refers to the phenomenon where the implementation of climate change policies in one country or region leads to an increase in greenhouse gas emissions in other countries or regions that have less stringent climate policies. This occurs as businesses and industries seek to relocate or shift their operations to areas with lower carbon pricing or environmental regulations.

5 Must Know Facts For Your Next Test

1. Carbon leakage can undermine the effectiveness of climate change policies by shifting emissions to other regions, potentially negating the emissions reductions achieved within the original policy jurisdiction.
2. The risk of carbon leakage is particularly high in energy-intensive and trade-exposed industries, such as steel, cement, and aluminum production.
3. Factors that contribute to carbon leakage include differences in energy prices, production costs, and environmental regulations between countries or regions.
4. Border carbon adjustments, where tariffs or taxes are imposed on imported goods based on their embedded carbon emissions, have been proposed as a way to mitigate the risk of carbon leakage.
5. Addressing carbon leakage is a key challenge in the design and implementation of effective global climate change policies, as it requires coordinated international efforts to ensure a level playing field for businesses.

Review Questions

• Explain how carbon leakage can undermine the effectiveness of climate change policies.
  • Carbon leakage can undermine the effectiveness of climate change policies by shifting emissions to other regions with less stringent environmental regulations. When businesses and industries relocate or shift their operations to areas with lower carbon pricing or weaker environmental policies, the emissions reductions achieved within the original policy jurisdiction can be offset or even exceeded by the increased emissions in the new locations. This can negate the intended climate benefits of the initial policy, highlighting the need for coordinated international efforts to address this issue.
• Describe the factors that contribute to the risk of carbon leakage and the industries most affected.
  • The risk of carbon leakage is particularly high in energy-intensive and trade-exposed industries, such as steel, cement, and aluminum production. Factors that contribute to carbon leakage include differences in energy prices, production costs, and environmental regulations between countries or regions. Businesses in these industries may seek to relocate or shift their operations to areas with lower carbon pricing or weaker environmental policies to maintain their competitiveness, leading to an increase in emissions in the new locations and undermining the effectiveness of the original climate change policies.
• Evaluate the role of border carbon adjustments in mitigating the risk of carbon leakage and discuss the challenges in implementing such policies.
  • Border carbon adjustments, where tariffs or taxes are imposed on imported goods based on their embedded carbon emissions, have been proposed as a way to mitigate the risk of carbon leakage. These policies aim to level the playing field for businesses and industries by ensuring that the carbon costs are accounted for in the prices of imported goods, reducing the incentive for companies to relocate to areas with less stringent environmental regulations. However, the implementation of border carbon adjustments faces several challenges, including concerns about trade barriers, the complexity of accurately measuring and verifying the carbon content of imported goods, and the need for international cooperation and coordination to ensure a fair and effective global approach to addressing carbon leakage.

Related terms

Carbon Pricing: A market-based approach to reducing greenhouse gas emissions by placing a cost on the emission of carbon dioxide and other greenhouse gases.

Emissions Trading Scheme (ETS): A cap-and-trade system that sets a limit on the total amount of greenhouse gases that can be emitted and allows companies to buy and sell emission allowances.

Border Carbon Adjustment: A policy measure that imposes a tax or tariff on imported goods based on the carbon emissions associated with their production, to level the playing field and prevent carbon leakage.