Tackling Leakage in a World of Unequal Carbon Prices

Project leader: Dr. Susanne Dröge

Project reports

This project is convened by Climate Strategies and has been commissioned to SWP.

Climate Strategies is an academic network organisation focused upon developing and delivering research to meet the needs of international climate change policymaking. It convenes international groups of experts to provide rigorous, fact-based and independent assessment on international climate change policy. To effectively communicate insights into climate change policy, Climate Strategies works with decision-makers in governments and business, particularly, but not restricted to, the countries of the European Union and EU institutions.

Project description:

For the future changes of the EU emission trading scheme (ETS) the competitiveness and carbon leakage effects are amongst the most controversial issues in the debate on stricter caps and auctioning of emission rights. While carbon leakage is of major concern to climate policy makers, industry and industrial policy makers pronounce competitive disadvantages from carbon pricing for energy-intensive industry with trade exposure. Leakage effects are becoming increasingly relevant for the next unilateral climate policy steps in the EU and in a number of countries (Australia, New Zealand, regions and provinces within the United States and Canada). Producers who cannot pass through carbon costs may adjust by reconsidering investment and production locations. If carbon pricing through stricter policies at home gives room for more emissions abroad, this clearly needs to be addressed by the governments that have or will be committed to mitigation in their territory. Moreover, in a world of unequal carbon prices, industries with carbon-intensive production need certainty about the policies that address leakage, and remedies should be considered at an early planning stage. Any of such measures, including free allocation, sector-specific agreements on emission standards, and border cost adjustments, need to be coordinated with trade partner countries and in the general negotiation process on a global climate regime under the UNFCCC.

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