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Intermediate Input Linkage and Carbon Leakage

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  • Zhang, Zengkai
  • Zhang, ZhongXiang

Abstract

Climate regulations tend to target energy intensive sectors whose products are widely used in industrial production as intermediate inputs, such as electricity, and the carbon abatement may be partially offset by intermediate input-led leakage. This paper aims to examine the impact of intermediate input linkage on the carbon leakage both theoretically and empirically. On the theoretical part, we develop a Harberger-type model with an input-output linkage structure, identify four leakage effects and derive closed-form solutions for these leakage effects. On the empirical part, we build a computable general equilibrium model of China for empirical simulation and introduce Structural Decomposition Analysis to link both the theoretical and empirical models. By imposing a carbon price on the electricity generation sector, our results show significant carbon leakage. Our decomposition analysis further suggests that such a leakage is mainly through the production substitution effect, followed by the multiplier effect. Both of the two effects are closely related to the intermediate input linkage, and thus shed some light on importance of considering sectoral linkage when discussing the carbon leakage issue of climate policies.

Suggested Citation

  • Zhang, Zengkai & Zhang, ZhongXiang, 2016. "Intermediate Input Linkage and Carbon Leakage," MITP: Mitigation, Innovation and Transformation Pathways 249350, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemmi:249350
    DOI: 10.22004/ag.econ.249350
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    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • F18 - International Economics - - Trade - - - Trade and Environment

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