Industrial and terrestrial carbon leakage under climate policy fragmentation

One of the main concerns in international climate negotiations is policy fragmentation, which could increase the carbon emissions of non-participating countries. Until very recently the carbon leakage literature has focused mainly on “industrial†carbon leakage through various channels, such as the induced changes in the prices of fossil fuels. But there is another potential channel that has received little attention so far: the carbon leakage triggered by land use changes, referred to as “terrestrial†carbon leakage. This paper explores the magnitudes of these two forms of leakage in a situation where CO2 emissions in all sectors, including from land use change, are taxed equally. We explore the implications of different fragmentation scenarios using the GCAM integrated assessment model. Our results show that total carbon leakage is at its highest when the biggest developing regions do not participate, but its rate decreases with the size of the coalition. We also show that under different fragmentation scenarios terrestrial carbon leakage may be the dominant type of leakage up to 2050, due to deforestation in non-participating regions. The implications of shifting food and bioenergy production to non-participating regions are also analyzed.