Reassessing Carbon Leakage

The issue of carbon leakage – where emission reductions in Annex B countries are offset by emission increases in non-Annex B countries – is often raised as an issue that will undermine climate policy. It is argued that under tight emissions constraints, some production will relocate to regions without emission constraints. The IPCC finds little evidence of carbon leakage and if it exists, it is most likely to be offset by positive spill-over effects. This finding seemingly contradicts the rapid growth in both global CO2 emissions and international trade. The underlying reason is that the IPCC only considers climate policy induced changes in emissions, while currently much of the growth in international trade and the location of production are driven by existing economic factors. In this paper, I argue for a redefinition of carbon leakage to include all emissions emitted in the production of traded products. This quantifies the separation between the environmental impacts of a countries consumption compared to production. Analysis of the emissions embodied in trade flows from 1990 to 2002 show evidence of a shift in the location of production and the products traded. There is a notable growth in China and given trends since 2002, it is likely that the separation between consumption and production has increased further. By considering the total emissions from the production of traded products, a different perspective of the role of trade in climate policy can be taken. This new focus considers trade as a tool to mitigate emissions and is a fruitful area for further research.