Estimating carbon leakage and the efficiency of border adjustments in general equilibrium - Does sectoral aggregation matter?

Estimates of the carbon leakage resulting from sub-global climate policies tend to be lower when using economy-wide general equilibrium models than what technology-specific and bottom-up models suggest. In order to test whether this difference is due to excessive sectoral aggregation, I exploit disaggregated data and estimate unobserved values to create a dataset with rich industrial sector detail. The bias caused by sectoral aggregation is estimated by calibrating a computable general equilibrium model to this dataset and comparing results with those generated from more aggregated data.A stylized unilateral carbon pricing policy is simulated. Results show that aggregated calibrations overestimate industrial output loss and underestimate the increase in the CO2 embodied in imports. The efficiency of border carbon adjustments at reducing leakage is also underestimated. However, I find that general equilibrium estimates of carbon prices and economy-wide leakage rates are mostly unaffected by the degree of industrial aggregation.

► The number of sectors in a computable general equilibrium model is expanded. ► The direction and magnitude of aggregation bias is estimated. ► Aggregated calibrations underestimate industrial trade response to carbon pricing. ► Leakage rates are mostly unaffected. ► Border carbon adjustments are perceived to be more effective at reducing leakage.