Assessment of carbon leakage by channels: An approach combining CGE model and decomposition analysis

As carbon leakage occurs through the channels of competitiveness, demand and energy, a detailed study of leakage channels in a unified framework is clearly warranted. This paper illustrates these three channels by a simplified theoretical general equilibrium model. It confirms the common concern that the competitiveness and demand channels as a whole cause relocation of energy-intensive production, and the energy channel leads to increased carbon-intensity in other regions, resulting in positive leakage. We propose an approach, combining computable general equilibrium (CGE) model and decomposition analysis, to decompose overall carbon leakage into three channels. The numerical simulation using the multi-region CGE model in China to study the carbon leakage from Hubei Pilot ETS is presented. The results show that (a) the competitiveness channel is the main source of carbon leakage, while the demand channel is smallest one; (b) carbon leakage rate through the energy channel is modest due to limited energy price fall. Policy implications of this study are also discussed.