IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v30y2021i6p1886-1903.html
   My bibliography  Save this article

Carbon Leakage: The Impact of Asymmetric Regulation on Carbon‐Emitting Production

Author

Listed:
  • Ximin (Natalie) Huang
  • Tarkan Tan
  • L. Beril Toktay

Abstract

Regions with carbon emission regulations bear the risk of “carbon leakage” if local producers shift production capacity to an unregulated region. We investigate the problem for a producer subject to geographically asymmetric emission regulation with uncertain future emission price. The producer has two ex ante options to lower its compliance cost: investing in clean production technology in the regulated region and building production capacity in the unregulated region. The producer determines its production quantities ex post, after emission price uncertainty is resolved. We study two anti‐leakage policies, Border Tax (BT) and Output‐Based Allocation (OB), where the former adopts a “stick” approach that penalizes offshore production and the latter adopts a “carrot” approach that grants free emission allowances for production in the regulated region. First, we show that the emission price uncertainty can exert opposing effects in the absence of an anti‐leakage policy: When the expected emission price is low (high), a higher uncertainty aggravates (mitigates) carbon leakage. Second, through a comprehensive comparison, we highlight that while both BT and OB are able to reduce carbon leakage, BT has a stronger effect in both the regulated and unregulated regions in multiple dimensions, especially when the carbon leakage risk is high. Third, we find that a higher emission price uncertainty weakens the effect of both BT and OB. We therefore suggest that emission price uncertainty should be accounted for when formulating anti‐leakage policies. Finally, we extend our analysis to a competitive case and find that the superiority of BT relative to OB is enhanced.

Suggested Citation

  • Ximin (Natalie) Huang & Tarkan Tan & L. Beril Toktay, 2021. "Carbon Leakage: The Impact of Asymmetric Regulation on Carbon‐Emitting Production," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1886-1903, June.
  • Handle: RePEc:bla:popmgt:v:30:y:2021:i:6:p:1886-1903
    DOI: 10.1111/poms.13181
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.13181
    Download Restriction: no

    File URL: https://libkey.io/10.1111/poms.13181?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David F. Drake, 2018. "Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Production Cost Advantage," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 667-686, October.
    2. Fan, Lin & Hobbs, Benjamin F. & Norman, Catherine S., 2010. "Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 193-208, November.
    3. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
    4. Fischer, Carolyn & Fox, Alan K., 2012. "Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 199-216.
    5. Guy Meunier & Jean‐Pierre Ponssard & Catherine Thomas, 2016. "Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 455-486, April.
    6. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    7. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516, Elsevier.
    8. repec:dau:papers:123456789/7970 is not listed on IDEAS
    9. Qing Ding & Lingxiu Dong & Panos Kouvelis, 2007. "On the Integration of Production and Financial Hedging Decisions in Global Markets," Operations Research, INFORMS, vol. 55(3), pages 470-489, June.
    10. Jean-Marc Burniaux & Joaquim Oliveira Martins, 2016. "Carbon Leakages: A General Equilibrium View," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 341-363, Springer.
    11. Monjon, Stéphanie & Quirion, Philippe, 2010. "How to design a border adjustment for the European Union Emissions Trading System?," Energy Policy, Elsevier, vol. 38(9), pages 5199-5207, September.
    12. Jan A. Van Mieghem, 2003. "Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 269-302, July.
    13. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
    14. Robin Smale & Murray Hartley & Cameron Hepburn & John Ward & Michael Grubb, 2006. "The impact of CO 2 emissions trading on firm profits and market prices," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 31-48, January.
    15. Michael Grubb & Karsten Neuhoff, 2006. "Allocation and competitiveness in the EU emissions trading scheme: policy overview," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 7-30, January.
    16. David F. Drake & Paul R. Kleindorfer & Luk N. Van Wassenhove, 2016. "Technology Choice and Capacity Portfolios under Emissions Regulation," Production and Operations Management, Production and Operations Management Society, vol. 25(6), pages 1006-1025, June.
    17. repec:dau:papers:123456789/7348 is not listed on IDEAS
    18. Jian Yang & Xiangtong Qi & Yusen Xia, 2005. "A Production-Inventory System with Markovian Capacity and Outsourcing Option," Operations Research, INFORMS, vol. 53(2), pages 328-349, April.
    19. Terry Eyland & Georges Zaccour, 2012. "Strategic Effects Of A Border Tax Adjustment," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 1-22.
    20. Jan A. Van Mieghem, 1999. "Coordinating Investment, Production, and Subcontracting," Management Science, INFORMS, vol. 45(7), pages 954-971, July.
    21. Heutel, Garth, 2011. "Plant vintages, grandfathering, and environmental policy," Journal of Environmental Economics and Management, Elsevier, vol. 61(1), pages 36-51, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hua Wang & Yanle Xie & Cuicui Wang & Weihua Huang, 2025. "Carbon Abatement and Socio-environmental Impacts Oriented to Government Policies and Corporate Social Responsibility," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(1), pages 4284-4308, March.
    2. Jia, Fu & Hu, Shoufeng & Chen, Lujie, 2025. "Impact of carbon border adjustment mechanism on the stock market value of high-polluting firms in China: The role of supply chain risk management and internationalization capabilities," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 197(C).
    3. Niu, Baozhuang & Zhang, Nan & Zhang, Jianhua, 2024. "How to Induce Multinational Firms’ Local Sourcing to Break Carbon Lock-in?," European Journal of Operational Research, Elsevier, vol. 315(2), pages 613-625.
    4. Hua, Jiawen & Lin, Jun & Wang, Kai & Qian, Yanjun, 2025. "Levying carbon tariffs considering foreign competition and technology choice," Omega, Elsevier, vol. 135(C).
    5. Fu, Ke & Li, Yanzhi & Mao, Huiqiang & Miao, Zhaowei, 2023. "Firms’ production and green technology strategies: The role of emission asymmetry and carbon taxes," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1100-1112.
    6. Wang, Minxue & Li, Bo & Song, Dongping, 2024. "The impact of blockchain on restricting the misuse of green loans in a capital-constrained supply chain," European Journal of Operational Research, Elsevier, vol. 314(3), pages 980-996.
    7. Wu, Qianni & Chiu, Chun-Hung, 2023. "The impacts of carbon insurance on supply chain and environment considering technology risk under cap-and-trade mechanism," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 180(C).
    8. Li, Yongjian & Yao, Song & Wang, Jun, 2023. "Signaling strategies in a low-carbon supply chain with platform encroachment," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 179(C).
    9. Zhou, Xiaoyang & Zhu, Qiuyun & Xu, Lei & Wang, Kai & Yin, Xiang & Mangla, Sachin Kumar, 2024. "The effect of carbon tariffs and the associated coping strategies: A global supply chain perspective," Omega, Elsevier, vol. 122(C).
    10. Lin, Xiaogang & Chen, Ying-Ju & Xiong, Hui, 2024. "Manufacturers’ efforts and platform’s demand information sharing in eco-friendly actions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 192(C).
    11. Xiaoshuai Fan & Kanglin Chen & Ying-Ju Chen, 2023. "Is Price Commitment a Better Solution to Control Carbon Emissions and Promote Technology Investment?," Management Science, INFORMS, vol. 69(1), pages 325-341, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hua, Jiawen & Lin, Jun & Wang, Kai & Qian, Yanjun, 2025. "Levying carbon tariffs considering foreign competition and technology choice," Omega, Elsevier, vol. 135(C).
    2. Hua, Jiawen & Wang, Kai & Lin, Jun & Qian, Yanjun, 2024. "Carbon Tax vs. Carbon Cap-and-Trade: Implementation of carbon border tax in cross-regional production," International Journal of Production Economics, Elsevier, vol. 274(C).
    3. Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
    4. Meunier, Guy & Ponssard, Jean-Pierre, 2014. "Capacity decisions with demand fluctuations and carbon leakage," Resource and Energy Economics, Elsevier, vol. 36(2), pages 436-454.
    5. Fang, Yuan & Yu, Yugang & Shi, Ye & Liu, Jie, 2020. "The effect of carbon tariffs on global emission control: A global supply chain model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).
    6. Demailly, Damien & Quirion, Philippe, 2008. "Changing the Allocation Rules in the EU ETS: Impact on Competitiveness and Economic Efficiency," Climate Change Modelling and Policy Working Papers 46623, Fondazione Eni Enrico Mattei (FEEM).
    7. David F. Drake, 2011. "Carbon Tariffs: Impacts on Technology Choice, Regional Competitiveness, and Global Emissions," Harvard Business School Working Papers 12-029, Harvard Business School.
    8. Xiaoshuai Fan & Kanglin Chen & Ying-Ju Chen, 2023. "Is Price Commitment a Better Solution to Control Carbon Emissions and Promote Technology Investment?," Management Science, INFORMS, vol. 69(1), pages 325-341, January.
    9. Lian-Biao Cui & Ma-Lin Song, 2017. "Designing and Forecasting the Differentiated Carbon Tax Scheme Based on the Principle of Ability to Pay," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-25, February.
    10. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    11. Stuart Evans & Michael A. Mehling & Robert A. Ritz & Paul Sammon, 2021. "Border carbon adjustments and industrial competitiveness in a European Green Deal," Climate Policy, Taylor & Francis Journals, vol. 21(3), pages 307-317, March.
    12. Melanie Hecht & Wolfgang Peters, 2019. "Border Adjustments Supplementing Nationally Determined Carbon Pricing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 93-109, May.
    13. Carlo Secchi & Antonio Villafranca (ed.), 2011. "Global Governance and the Role of the EU," Books, Edward Elgar Publishing, number 14411.
    14. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    15. David F. Drake, 2018. "Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Production Cost Advantage," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 667-686, October.
    16. Carol McAusland & Nouri Najjar, 2015. "Carbon Footprint Taxes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(1), pages 37-70, May.
    17. Tang, Weiqi & Qian, Haoqi & Wu, Libo, 2015. "China’s CO2 Emission Peaking and Leakage -- A Decomposition for Direct and Indirect Carbon Leakage," Conference papers 332668, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    18. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS: Border adjustment or output-based allocation?," Ecological Economics, Elsevier, vol. 70(11), pages 1957-1971, September.
    19. Zhu, Lei & Zhang, Xiao-Bing & Li, Yuan & Wang, Xu & Guo, Jianxin, 2017. "Can an emission trading scheme promote the withdrawal of outdated capacity in energy-intensive sectors? A case study on China's iron and steel industry," Energy Economics, Elsevier, vol. 63(C), pages 332-347.
    20. Antonio Villafranca, 2011. "‘Europe 2020’: The Shift to a Revised Climate Strategy," Chapters, in: Carlo Secchi & Antonio Villafranca (ed.), Global Governance and the Role of the EU, chapter 8, Edward Elgar Publishing.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:30:y:2021:i:6:p:1886-1903. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.