Carbon leakage

Carbon leakage refers to the situation where, as a result of stringent climate policies in one country or group of countries, businesses transfer production to other countries with laxer emission constraints. This can lead to an increase in total global emissions, undermining the environmental benefits of the original policies.

Causes

Carbon leakage can occur due to several factors:

• Regulatory differences: When countries have different levels of environmental regulations, companies may relocate to countries with less stringent rules.
• Cost of compliance: High costs associated with meeting environmental regulations can drive businesses to move operations to countries where compliance is cheaper.
• Market dynamics: Changes in the global market, such as shifts in demand and supply, can also contribute to carbon leakage.

Sectors Affected

Certain sectors are more prone to carbon leakage due to their high energy consumption and emissions intensity. These include:

• Manufacturing
• Cement production
• Steel production
• Chemical industry

Mitigation Strategies

To address carbon leakage, several strategies can be employed:

• Carbon border adjustment mechanisms: These are tariffs on imported goods from countries with less stringent climate policies.
• International agreements: Global agreements like the Paris Agreement aim to harmonize climate policies across countries.
• Subsidies and incentives: Providing financial support to industries to help them comply with environmental regulations without relocating.

Implications

Carbon leakage has significant implications for both environmental policy and international trade:

• It can undermine the effectiveness of national and regional climate policies.
• It can lead to competitive disadvantages for businesses in countries with stringent climate policies.
• It can create tensions in international trade relations.

See Also

• Climate change
• Greenhouse gas emissions
• Environmental policy
• Sustainable development