The Effect of Trade Liberalisation on Carbon Leakage Under the Kyoto Protocol: Experiments with GTAP-E

A group of industrialised countries and countries with economies in transition have agreed to reduce their emissions of greenhouse gases under the Kyoto Protocol of the United Nations Framework Convention on Climate Change. Because of impacts on international trade and investments, the emission reduction policies of these countries - the so-called Annex I countries - could lead to loss of competitiveness and carbon leakage. In the context CO2 reduction policies, changes in import tariffs and other trade barriers have received little attention in the literature. This paper presents quantitative estimations of the impacts of the implementation of the Kyoto agreements on carbon leakage with and without freer trade. The calculations are made with a static, multisector, multiregion applied general equilibrium model (GTAP-E) that allows for inter-fuel and interfactor substitutions. We find that under a plausible range of assumptions, the implementation of the Uruguay Round reductions of import tariffs a) increases the rate of carbon leakage by around 3 percent-points, but b) does not reduce the competitiveness of energy-intensive industries in Annex 1 countries.