China’s CO2 Emission Peaking and Leakage -- A Decomposition for Direct and Indirect Carbon Leakage

China pledge to peak its CO2 emission by 2030. With a GTAP-E based dynamic CGE model, we analyzed its domestic and global implication. Results indicated that China need a 12% yearly growth of carbon price to meet the target, which will lead to 10% of carbon leakage. With reference to GVC literature, we managed to decompose and trace the path of leakage and identify its driving forces. From a demand perspective, India, US and South Africa consume have increases in their CO2 demand while world total (other than China) decreases by 2%. From a production perspective, substitution and relocation effect lead to a 22% of carbon leakage, among which developed regions plus India are the main contributor. Autonomous adjustment in global trade flow mitigate half of this effect. In a “post Kyoto era”, developing economies’ participation in GHG mitigation will complicate the transmission of carbon leakage through horizontal (to other developing countries) and vertical leakage (to developed countries). This paper integrated CGE model with carbon flow analysis, and enables us to quantify the driving forces of leakage on a bilateral level, and provides us with an in- depth perspective to understand the global effect of climate policies. Key words Carbon leakage, China emission peaking, dynamic CGE, global value chain, decomposition