Carbon leakage
Encyclopedia
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:
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).
. This is based on the theory of nonrenewable resources (Goldemberg et al., 1996, pp. 27-28). The potential emissions from coal, oil and gas is limited by the supply of these nonrenewable resources. To a first approximation, the total emissions from oil and gas is fixed, and the total load of carbon in the atmosphere is determined by coal usage.
A policy that, for example, sets a carbon tax
only in developed countries might lead to leakage of emissions to developing countries. However, a negative leakage (i.e., leakage having the effect of reducing emissions) could also occur due to a lowering in demand and price for oil and gas. This might lead coal-rich countries to use less coal and more oil and gas, thus lowering their emissions (Goldemberg et al., 1996, pp. 27-28). While this is of short-term benefit, it reduces the insurance provided by limiting the consumption of oil and gas. The insurance is against the possibility of delayed arrival of backstop technologies. If the arrival of backstop technologies is delayed, the substitution of coal for oil and gas might have no long-term benefit. If the backstop technology arrives earlier, then the issue of substitution becomes unimportant. In terms of climate policy, the issue of substitution means that long-term leakage needs to be considered, and not just short-term leakage (Goldemberg et al., 1996, p. 28).
Estimates of leakage rates for action under the Kyoto Protocol
ranged from 5 to 20% as a result of a loss in price competitiveness, but these leakage rates were viewed as being very uncertain. For energy-intensive industries, the beneficial effects of Annex I actions through technological development were viewed as possibly being substantial. This beneficial effect, however, had not been reliably quantified. On the empirical evidence they assessed, Barker et al. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., the EU ETS, were not significant.
Recent North American emissions schemes such as the Regional Greenhouse Gas Initiative
and the Western Climate Initiative
are looking at ways of measuring and equalising the price of energy 'imports' that enter their trading region
Carbon dioxide
Carbon dioxide is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom...
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
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
, 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).
Coal, oil and "backstop" technologies
The issue of carbon leakage can be interpreted from the perspective of the reliance of society on coal, oil, and "backstop" (less polluting) technologies, e.g., biomassBiomass
Biomass, as a renewable energy source, is biological material from living, or recently living organisms. As an energy source, biomass can either be used directly, or converted into other energy products such as biofuel....
. This is based on the theory of nonrenewable resources (Goldemberg et al., 1996, pp. 27-28). The potential emissions from coal, oil and gas is limited by the supply of these nonrenewable resources. To a first approximation, the total emissions from oil and gas is fixed, and the total load of carbon in the atmosphere is determined by coal usage.
A policy that, for example, sets a carbon tax
Carbon tax
A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...
only in developed countries might lead to leakage of emissions to developing countries. However, a negative leakage (i.e., leakage having the effect of reducing emissions) could also occur due to a lowering in demand and price for oil and gas. This might lead coal-rich countries to use less coal and more oil and gas, thus lowering their emissions (Goldemberg et al., 1996, pp. 27-28). While this is of short-term benefit, it reduces the insurance provided by limiting the consumption of oil and gas. The insurance is against the possibility of delayed arrival of backstop technologies. If the arrival of backstop technologies is delayed, the substitution of coal for oil and gas might have no long-term benefit. If the backstop technology arrives earlier, then the issue of substitution becomes unimportant. In terms of climate policy, the issue of substitution means that long-term leakage needs to be considered, and not just short-term leakage (Goldemberg et al., 1996, p. 28).
Current schemes
Barker et al. (2007) assessed the literature on spillover effects and carbon leakage. They defined carbon leakage as the increase in CO2 emissions outside of the countries taking domestic mitigation action, divided by the reduction in emissions of countries taking domestic mitigation action. Accordingly, a leakage rate greater than 100% would mean that domestic actions to reduce emissions had had the effect of increasing emissions in other countries to a greater extent, i.e., domestic mitigation action had actually led to an increase in global emissions.Estimates of leakage rates for action under the Kyoto Protocol
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
ranged from 5 to 20% as a result of a loss in price competitiveness, but these leakage rates were viewed as being very uncertain. For energy-intensive industries, the beneficial effects of Annex I actions through technological development were viewed as possibly being substantial. This beneficial effect, however, had not been reliably quantified. On the empirical evidence they assessed, Barker et al. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., the EU ETS, were not significant.
Recent North American emissions schemes such as the Regional Greenhouse Gas Initiative
Regional Greenhouse Gas Initiative
Regional Greenhouse Gas Initiative is a regional initiative by states and provinces in the Northeastern United States and Eastern Canada regions to reduce greenhouse gas emissions...
and the Western Climate Initiative
Western Climate Initiative
The Western Climate Initiative, or WCI, is an initiative—started by states and provinces along the western rim of North America—to combat climate change caused by global warming, independent of their national governments....
are looking at ways of measuring and equalising the price of energy 'imports' that enter their trading region
See also
- Carbon shiftingCarbon shiftingCarbon shifting is the tendency for an individual to increase carbon dioxide emissions in one area of their lifestyle as a result of reducing emissions elsewhere....
- Carbon taxCarbon taxA carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...
- Embedded emissionsEmbedded emissionsOne way of attributing greenhouse gas emissions is to measure the embedded emissions of goods that are being consumed . This is different from the question of to what extent the policies of one country to reduce emissions affect emissions in other countries...
- Emissions tradingEmissions tradingEmissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....