Assessing alternative solutions to carbon leakage

A modified version of the computable general equilibrium GTAP-E model is developed in order to assess the economic and carbon emission effects of alternative trade policy measures aimed at reducing carbon leakage. We compare several unilateral policy measures implemented by countries subject to an emissions level cap. Results provide evidence of the scarce effectiveness of these policies in reducing the carbon leakage rate and, conversely, some of the trade measures that are discussed seem to be more consistent with the goal of protecting market shares of national firms in the domestic markets of abating countries. Assessing environmental and competitiveness outcomes jointly confirms that a global cooperative solution would be the most effective as well as an efficient policy option for reducing carbon leakage.

► The effectiveness of carbon tariffs in reducing carbon leakage is limited. ► Carbon tariffs could even be damaging in terms of economic competitiveness. ► A cooperative solution is welfare improving with respect to all carbon tariffs. ► A global rather than a unilateral solution to carbon leakage is highly recommended.