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Mind the Market: A Novel Measure of Carbon Leakage Risk

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  • Alienor Cameron

Abstract

Defining a fair and transparent measure of carbon leakage risk is essential to ensure the effectiveness of the EU's climate policies. This paper proposes a novel methodology to assess this risk, which takes market structure into account -- a key factor often overlooked in both academic research and policymaking. The methodology involves applying the micro-founded hypothetical monopolist test (or SSNIP test) at the country-product level. It allows for the definition of the relevant market for four products in the steel and cement industries. The inputs required for the hypothetical monopolist test are derived by estimating a product-level gravity equation. The findings from this study illustrate that market structure differs substantially at the product level, even within a single industry. Clinker appears as the product most at risk of carbon leakage. This suggests that carbon leakage risks should be computed by policymakers at a highly granular level and taking market structure into account.

Suggested Citation

  • Alienor Cameron, 2025. "Mind the Market: A Novel Measure of Carbon Leakage Risk," EconomiX Working Papers 2025-17, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2025-17
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    References listed on IDEAS

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    1. Balistreri, Edward J. & Rutherford, Thomas F., 2012. "Subglobal carbon policy and the competitive selection of heterogeneous firms," Energy Economics, Elsevier, vol. 34(S2), pages 190-197.
    2. James R. MARKUSEN, 2021. "International Externalities And Optimal Tax Structures," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 16, pages 341-355, World Scientific Publishing Co. Pte. Ltd..
    3. Jared C. Carbone & Nicholas Rivers, 2017. "The Impacts of Unilateral Climate Policy on Competitiveness: Evidence From Computable General Equilibrium Models," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 24-42.
    4. Anthony de Carvalho & Naoki Sekiguchi, 2015. "The structure of steel exports: Changes in specialisation and the role of innovation," OECD Science, Technology and Industry Working Papers 2015/7, OECD Publishing.
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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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