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This study exploits the incomplete participation requirements of the European Union Emissions Trading System (EU ETS) to investigate the policy's causal effect on outward foreign direct investment (FDI) decisions of German multinational firms. Using a combination of difference-in-differences with bias-corrected matching, our baseline specification indicates that the sample average treatment effect is very small and levels out at −0.2%, but its standard error is large (0.16). Looking at a sub-sample of firms which can be considered as geographically more mobile because they are supposedly less capital-intensive, we find that a small number of EU ETS regulated firms have increased their FDI outside the EU by 52 % ± 47 % compared to a counterfactual scenario. Paradoxically, relocating firms neither operate in the targeted energy-intensive sectors, nor are they emission-intensive. The small emissions share of these footloose firms indeed indicates a limited potential for policy-induced leakage of emissions. On the extensive margin, we find that all EU ETS firms on average have increased the number of their affiliates outside the EU by 28 % ± 24 % relative to control firms. This causal change in network structures of multinational firms outside the EU is suggestive of endeavors undertaken by regulated firms to facilitate relocations in the future.

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.

We use facility-level panel data on CO2 emissions to investigate within-firm carbon leakage associated with Japanese regional emission trading systems (ETSs) at large-scale facilities in Tokyo and Saitama prefectures. A difference-in-difference analysis reveals that, relative to entities with no facility under ETSs, entities with regulated facilities have reduced emissions not only from these regulated facilities but also from unregulated facilities outside Tokyo/Saitama. This result indicates that regional ETSs serve as a turning point for entities to bridge the energy-efficiency gap. The data also suggest that a larger entity is more capable of reducing emissions from facilities in regions with less stringent regulations.

The core of the 36th round of Energy Modeling Forum project shows that it is more likely that major fossil-fuel exporters, such as the Middle East, are highly affected because of the decrease in fossil-fuel extractions required for the worldwide fulfillment of the Paris agreement. To analyze these general findings in-depth, we employ a multi-region, multi-sector computable general equilibrium model of global trade and energy to examine the effects of implementing the Paris agreement with a focus on the Middle East which is further disaggregated into Iran, Saudi Arabia, the rest of net fossil fuel exporting countries (XFE), and the rest of countries (XNE). After examining the abatement costs for the regions, we apply four emission reduction targets, ranging from a low ambition level to a high ambition level. We develop comprehensive scenarios covering several cooperation options within the Middle East and between the Middle East and regions outside. The results show that Iran has the lowest marginal abatement cost in the Middle East, followed by XNE, XFE, and Saudi Arabia. If the Middle East does not implement any climate policy, the welfare losses can be slightly compensated due to a carbon leakage to the Middle East. The cooperations within the Middle East are not welfare increasing for the region as a whole when Iran mostly benefits from such a cooperation whereas Saudi Arabia loses welfare. The Middle East benefits from a global cooperation and the cooperation with Europe, but the cooperation with China, India, or Russia can be welfare decreasing.

Carbon leakage caused by unbalanced climate policy constraints seriously damages the process of global climate governance. As far as developing countries are concerned, carbon leakage through investment is a more urgent issue. Based on firm level data, we employ PSM-DID to evaluate the impact of China’s pilot ETSs on firm's outward direct investment decision. The empirical results prove that ETS has accelerated both the depth and breadth of outward direct investment from China. The Belt and Road Initiative has facilitated carbon leakage through investment. The host countries without ETS are more attractive than belonging to Belt and Road countries for China's OFDI. The firm's production efficiency, ownership, and marketization level of home region also have important impacts on carbon leakage. China should fully consider carbon leakage in progress of formulating national emissions trading system and actively promote the construction of a green Belt and Road through carbon market linking.

International audience; Output-based allocations (OBAs) are typically used in emission trading systems (ETS) with a fixed cap to mitigate leakage in sectors at risk. Recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some flexibility in the total cap, resulting in a carbon price closer to marginal damage. We extend previous work to simultaneously include both leakage and volatility. We study how OBA permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts OBA permits from the overall permit allocation as is the current practice in the EU-ETS and California. We show that introducing OBA permits while keeping the overall cap fixed would only increase price fluctuations and induce severe welfare losses to non-OBA sectors.

Intensity standards have gained substantial momentum as a regulatory instrument in US climate policy. Energy-intensive and trade-exposed industries are traditionally opposed to initiatives for domestic carbon pricing as they are particularly vulnerable to competitiveness losses and refer to counterproductive emission leakage in a unilateral climate policy context. This has led to policy proposals where intensity standards on energy and carbon might at least in part substitute for explicit carbon pricing via taxes or emission allowances. In this paper we study the economic efficiency properties of intensity standards as an instrument of unilateral climate policy. We first develop a theoretical partial equilibrium framework and show that standards can have an ambiguous effect on carbon leakage. We then use an applied computable general equilibrium model of the global economy to gain quantitative insights into the effects of intensity standards for the case of the US. Our numerical results show that intensity standards may rather increase than decrease carbon leakage. Moreover, standards can lead to considerable welfare losses compared to uniform emission taxing. The tradability of standards across industries is a mechanism that can reduce these negative effects.

The objectives of this paper are to analyse the economy-wide effects of international climate policy on the Russian economy as well as the effects of Russia's climate policy on European economies. Our analysis is based on a general equilibrium model that includes inertias, such as imperfect sectoral labour mobility and vintage capital, and has a detailed depiction of the power generation sector. We found that international climate policy could reduce Russia's private welfare by 1.8% annually due to lower revenues from exports of fossil fuels. At the sectoral level, Russia could gain a comparative advantage in producing energy-intensive commodities and hence Russia's producers of those commodities increase their production and export supplies. This could result in a carbon leakage in Russia. Eliminating implicit subsidies on domestic consumption of gas and petroleum products could reduce Russia's private welfare loss by 0.6% points and eliminate the carbon leakage. Nevertheless, eliminating implicit subsidies on gas and petroleum products might not be sufficient to achieve the pledged emission reductions by 2030. Moreover, this leads to an undesirable increase in coal consumption and therefore, some additional climate policy such as a carbon tax or an emission trading system might be required. We also found that Russia's climate policy could have positive but moderate effects on the European economies; in particular, countries such as Lithuania, Slovakia, and Hungary benefit due to decreased export prices for gas, crude oil, and petroleum products from Russia.

As part of its climate policy, the European Union (EU) aims to reduce greenhouse gas (GHG) emissions levels by 20% by the year 2020 compared to 1990 levels. Although the EU is projected to reach this goal, its achievement of objectives under its Emissions Trading System (ETS) may be delayed by carbon leakage, which is defined as a situation in which the reduction in emissions in the ETS region is partially offset by an increase in carbon emissions in the non-ETS regions. We study the interaction between emissions and hydropower availability in order to estimate the magnitude of carbon leakage in the South-East Europe Regional Electricity Market (SEE-REM) via a bottom-up partial equilibrium framework. We find that 6.3% to 40.5% of the emissions reduction achieved in the ETS part of SEE-REM could be leaked to the non-ETS part depending on the price of allowances. Somewhat surprisingly, greater hydropower availability may increase emissions in the ETS part of SEE-REM. However, carbon leakage might be limited by demand response to higher electricity prices in the non-ETS area of SEE-REM. Such carbon leakage can affect both the competitiveness of producers in ETS member countries on the periphery of the ETS and the achievement of EU targets for CO2 emissions reduction. Meanwhile, higher non-ETS electricity prices imply that the current policy can have undesirable outcomes for consumers in non-ETS countries, while non-ETS producers would experience an increase in their profits due to higher power prices as well as exports. The presence of carbon leakage in SEE-REM suggests that current EU policy might become more effective when it is expanded to cover more countries in the future.

This study proposes an alternative input–output based spatial structural decomposition analysis to elucidate the importance of domestic regional heterogeneity and inter-regional spillover effects in determining China's regional CO 2 emissions growth. Our empirical results, based on the 2007 and 2010 Chinese inter-regional input–output tables, show that changes in most regions' final demand scale, final expenditure structure, and export scale have positive spatial spillover effects on other regions' CO 2 emissions growth; changes in most regions' consumption and export preference help reduce other regions' CO 2 emissions; changes in production technology and investment preferences may exert positive or negative effects on other region's CO 2 emissions growth through domestic supply chains. For some regions, the aggregate spillover effect from other regions may be larger than the intra-regional effect in determining regional emissions growth. All these facts can significantly help provide a better, deeper understanding of the driving forces behind the growth of regional CO 2 emissions and can thus enrich the policy implications concerning a narrow definition of “carbon leakage” through domestic inter-regional “trade” as well as a relevant political consensus about responsibility sharing between developed and developing regions inside China.

Recent multilateral climate negotiations have underlined the importance of international cooperation and the need for support from developed to developing countries to address climate change. This raises the question of whether carbon market linkages could be used as a cooperation mechanism. Policy discussions surrounding such linkages have indicated that, should they operate, a limit would be set on the amount of carbon permits that could be imported by developed regions from developing countries. This paper analyzes the impact of limited carbon trading between an ETS in the EU or the US and a carbon market covering Chinese electricity and energy intensive sectors using a global economy-wide model. We find that the limit results in different carbon prices between China and Europe or the US. Although the impact on low-carbon technologies in China is moderate, global emission reductions are deeper than in the absence of international trading due to reduced carbon leakage. If China captures the rents associated with limited permit trading, we show that it is possible to find a limit threshold that makes both regions better off relative to carbon markets operating in isolation.

In the discussion on the potential risk of carbon leakage related to the EU ETS and the effect of safeguard measures, the scope for passing through carbon costs into final product prices is considered a key issue. This study investigates whether and to what extent ETS-related carbon costs have been passed through into product prices by EU industry. Literature on the issue of carbon cost pass-through in industry, other than electric power generation, is relatively sparse and we therefore aim to add to the knowledge gathered in this area so far. We investigate a number of products in six industry sectors in several European countries and regions and provide estimates for carbon cost pass-through for more than 50 product/country pairs. In line with the literature, our econometric results imply significant cost pass-through for a number of products, with results being most conclusive for the cement, iron and steel, and refineries sectors. The extent of the estimated pass-through rates diverges between products and countries/regions. These findings are aimed at informing discussions about carbon leakage protection for industries covered by the EU ETS.

In response to climate change issues, China has set clear targets to reduce emissions. The establishment of a carbon emissions trading scheme (ETS) has an important role in China's achievement of these targets. China designed its ETS in 2011 and implemented it in pilot regions in 2013. This study investigated whether the ETS reduces carbon emissions and how it influences carbon leakage. First, the production-based emissions, consumption-based emissions, and carbon leakage of 28 industries in 30 provinces during 2005–2015 were calculated based on provincial environmentally extended input–output tables. Then, the difference-in-differences and difference-in-difference-in-differences models were used to evaluate the effectiveness of ETS. The following conclusions were derived. (1) ETS contributes to emissions mitigation in pilot regions and industries. (2) ETS has greater effect on the mitigation of production-based emissions than consumption-based emissions. (3) ETS encourages outsourcing of emissions from pilot areas to non-pilot areas, resulting in carbon leakage (or “pollution haven” effect), which aggravates the imbalance of emissions transfers among China's provinces. The success of China's ETS in promoting emissions mitigation can serve as an example for other emerging economies.

Carbon taxes increase costs for energy-consuming firms and can impact firms‘ ability to compete with other firms located in regions without that tax. This paper considers the effect of asymmetric carbon taxation when firms are able to adjust their energy efficiency investment levels to reflect the presence of the tax. Using a dynamic model of firm competition, we find that allowing firms to adjust their energy efficiency levels in response to a carbon tax could potentially allow firms to significantly mitigate the competition effects of that carbon tax. In our baseline parameterization, additional energy efficiency investments non-trivially mitigates profit loss for the firm facing the carbon tax as well as spurring adding energy efficiency investments in the non-taxing jurisdiction, thus reducing carbon leakage. This increase in energy efficiency can potentially reduce total energy usage by the firm in the taxing jurisdiction by more than the carbon tax alone. While the quantitative impact of energy efficiency investments on firm competitiveness depends on the nature of the industry, from a policy standpoint, the ability of energy efficiency investments to mitigate cross-border emissions leakage and negative competition effects without policy interventions such as a carbon border tax softens these two common criticisms of unilateral regional carbon taxes.

This paper studies the effect of endogenous technical change and international technology spillovers on carbon leakage. It is well known that a unilateral CO2 abatement policy in one region may cause CO2 emissions to increase in non-abating regions because of the relocation of CO2-intensive firms and because of energy market effects. If, however, the CO2 mitigation policy induces energy-saving technological innovation in the home region and this innovation can freely spill-over to energy users abroad, carbon leakage may be offset by induced efficiency gains in foreign firms. In this paper we develop a simple mathematical model of carbon leakage and technological spillovers and perform numerical simulations with an adjusted CGE model to illustrate the potential importance of international technology spillovers. We show that carbon leakage can become negative at moderate levels of technology spillover.

We use a Computable General Equilibrium model to empirically examine the Double Dividend (DD) hypothesis. Using the GTAP model data for Australia, we examine three environmental taxes on the production of energy goods. Following Bento and Jacobsen (2007) , we examine the role played by specific factors in the production of energy goods. Our results provide support for the existence of a strong DD in Australia when revenue is recycled through reductions in consumption taxes. The strong DD is larger when the share of specific factors is higher, and is much more pronounced when carbon taxes are charged on the production (origin-based accounting) rather than the usage (destination-based accounting) of carbon. These results draw attention to the importance of the definition of the carbon base and have implications for the scale of carbon leakage.

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 CO 2 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.

When carbon markets are fragmented and carbon prices vary across regions, concerns arise that acting countries may encounter competitiveness and welfare losses and changes in production may lead to carbon leakage. Border Carbon Adjustments (BCAs) have been proposed as a response measure to address these issues. However, more cooperative response policies, such as linking carbon markets, can also reduce the burden of emission reduction in acting countries and help level carbon prices. This paper analyses the effects of BCAs and both direct and indirect linking on welfare, competitiveness and carbon leakage within a global recursive-dynamic computable general equilibrium (CGE) model. Results illustrate that an uneven carbon pricing can indeed lead to substantial competitiveness and welfare losses for acting countries as well as to carbon leakage. Of the instruments investigated in this paper, BCAs appear to be the best measure to preserve the competitiveness of acting countries as they shift part of the burden of emission reductions to non-acting countries. While BCAs are effective for acting countries, they cause severe welfare and competitiveness losses for non-acting countries. As a result, BCAs are less effective than linking in reducing global welfare losses, as linking tends to be beneficial for both acting and non-acting countries. The advantages of BCAs diminish as the carbon market is extended to more emission sources or to a wider international participation.

Climate policy arrangements of partial regional coverage, as they seem to emerge from the UNFCCC process, might lead to carbon leakage and hence a broad literature has developed to quantify leakage. Most of these analyses, however, are confined to consider emissions from fuel combustion only. Yet, some of the most relevant simultaneously energy intensive and internationally trade exposed sectors are also subject to substantial emissions from industrial processes. Carbon dioxide emissions can be released in industrial processes which physically or chemically transform materials. In the steel and cement sectors, for example, these process emissions amount to about half of sector carbon dioxide emissions in many countries. We incorporate industrial process emissions based on UNFCCC data into a multi-sectoral multi-regional computable general equilibrium model and analyze the implications of a unilateral EU 20% carbon dioxide emission reduction policy on leakage and the effectiveness of border carbon adjustment in reducing leakage. By comparing the results to a model without process emissions, we find that leakage of climate policy so far has been underestimated. Leakage turns out to be higher when process emissions are correctly accounted for (38% instead of 29% for combustion emissions only). Conversely, border carbon adjustment measures are found to be roughly twice as effective to reduce leakage rates, when process emissions are correctly accounted for — as carbon adjustment rates are more directly targeted to the relevant sectors. Yet, border carbon adjustment measures should not be seen as a panacea as they might impede necessary technological carbon-free innovation, unless they are phased out over time.

Subglobal climate policies will be the norm for some years to come. However, several options exist for improving the efficiency of domestic emissions regulation. A prominent but contentious policy option for improving the external efficiency is the implementation of carbon tariffs on non-regulating regions. This is thought to reduce carbon leakage and increase domestic production, albeit at the cost of non-regulating countries. In contrast, internal efficiency improvements can be more collaborative in type. Among others, they include extending and linking of domestic emissions-trading systems. This study compares the relative economic impacts of those policy options if Annex I countries would follow one or the other. The study uses a computable-general-equilibrium model of the global world economy and develops a set of emissions-trading and carbon-tariff scenarios with various degrees of sectoral and regional coverage. For a globally effective Annex I emissions-reduction target of 20%, the results indicate that linking Annex I countries' domestic emissions-trading systems and expanding their sectoral coverage could yield greater global welfare improvements than implementing carbon tariffs on energy-intensive goods imported from non-Annex I countries. While non-Annex I countries would be significantly better off without facing carbon tariffs on their exports, Annex I countries could gain from either policy. The relative gains from linking and extending the sectoral coverage of domestic emissions-trading systems are greater for early policy implementation within a large Annex I coalition of climate-regulating countries, while late implementation within a small coalition would yield greater relative welfare gains from imposing carbon tariffs. The results suggest that, in addition to the political benefits, there exists an economic rationale for substituting the external efficiency improvements associated with implementing carbon tariffs with internal ones associated with extending Annex I countries' emissions-trading systems. © 2012 Elsevier B.V.

In the absence of effective world-wide cooperation to curb global warming, import tariffs on embodied carbon have been proposed as a potential supplement to unilateral emissions pricing. We consider alternative designs for such tariffs, and analyze their effects on global welfare within a multi-region, multi-sector computable general equilibrium (CGE) model of global trade and energy. Our analysis suggests that the most cost-efficient policy could be region-specific tariffs on all products, based on direct plus electricity emissions. In the end, however, the potential cost savings through carbon tariffs must be weighed against the administrative costs as well as legal issues and political considerations.

We analyze subglobal action to mitigate climate change with a consideration of recent advances in the theory of international trade. Subglobal action impacts emissions in unconstrained countries (carbon leakage) through international trade channels. Consequently, estimates of the efficacy of subglobal action, tariffs on embodied carbon, and the distribution of policy costs will be sensitive to the assumed structure of international trade. While most climate-policy models rely on an Armington (1969) structure of international trade, recent empirical evidence supports a new theory suggested by Melitz (2003). We find significant quantitative and qualitative differences when we consider the Melitz trade structure. These differences are important as an alternative, and arguably more plausible, representation of how trade and border adjustments interact with climate policy.

Issues of emission leakage and competitiveness are at the fore of the climate policy debate in all the major economies implementing or proposing to implement substantial emission cap-and-trade programs. Unilateral climate policy cannot directly impose emission prices on foreign sources, but it can complement domestic emission pricing with border carbon adjustment to reduce leakage and increase global cost-effectiveness. While border carbon adjustment has a theoretical efficiency rationale, its practical implementation is subject to serious caveats. This article summarizes the results of an Energy Modeling Forum study (EMF 29) on the efficiency and distributional impacts of border carbon adjustment. We find that border carbon adjustment can effectively reduce leakage and ameliorate adverse impacts on energy-intensive and trade-exposed industries of unilaterally abating countries. However, the scope for global cost savings is small. The main effect of border carbon adjustment is to shift the economic burden of emission reduction to non-abating countries through implicit changes in international prices.

Using a multi-region, multi-sector computable general equilibrium (CGE) model, this paper compares the efficiency, distributional and emission leakage effects of border tax adjustments (BTAs) as part of unilateral climate policies that are based on carbon dioxide (CO2)-only versus those based on all greenhouse gases (GHGs). Simulation results suggest that the broad-based GHG policies in general have lower efficiency costs and result in less re-distributive effects. BTAs bring modest efficiency gains with adverse distributional consequences. The distributional impacts are smaller under broad-based GHG policies compared to that based on CO2 only. However, these are due to a wider variety of abatement options under multi-gas policies rather than the BTAs per se. The main difference between the two policies is distributional effects. First, CO2-only based policies have worse impacts on fossil fuel exporters such as Russia and relatively better outcomes for oil importers such as India and China, compared to that of multi-gas policies particularly when it involves large global emission reduction. Second, sectoral coverage under BTAs also influences the differential outcomes. For example, Brazil is worse impacted under GHG-based policies if agriculture is brought under BTAs as two-third of its emissions are non-CO2 based and agriculture is the primary source of these emissions.

Understanding fossil fuel supply behaviour is crucial for interpreting carbon leakage and assessing the potential effectiveness of border measures in climate policy. In most computable general equilibrium models, this fossil fuel supply is derived from a constant elasticity of substitution production function, in which a natural resource is treated as a fixed factor. We show that this leads to endogenously decreasing supply elasticities and sharply increasing marginal leakage rates for large coalitions that have ambitious emissions targets, particularly when fuel exporters participate in the coalition. We propose an alternative production function that has a constant elasticity of fuel supply, which results in more stable leakage rates and a different share of trade-related leakage. The role of this model variation for the assessment of border measures in climate policy turns out to be limited. In those cases where the model versions differ most (i.e. large coalition, ambitious targets), border measures have a small effect anyway.

Considering the dual context of China's domestic willingness to have a cleaner export structure and the widespread concern among developed countries that carbon leakage from developing countries, particularly China, could threaten their own climate policy effectiveness; this paper uses the SICGE model to investigate the economic rationale of taxing direct CO 2 emissions of export in China. With an export carbon tax set at 200 yuan/t CO 2 , three policy scenarios were studied, where the tax revenue is: undistributed; redistributed neutrally to stimulate investment; and redistributed neutrally to stimulate consumption. According to the model, the economic and climate effects of the different policy scenarios are not particularly distinguishable. The economic impacts are slightly negative while the effect on the export structure is significant: the export of major energy-intensive products decreased and the export of certain sectors (labour-intensive or with higher value-added) increased, resulting in a cut of 3.77% in total direct CO 2 emissions from exports. The revenue redistribution to stimulate consumption is shown to be the optimal scenario choice, which was confirmed by further sensitivity tests. By reviewing related WTO laws, this paper concludes that a clearly designed export carbon tax with a comparable carbon price is in China's own interest, while lessening the carbon leakage concerns of developed countries.

This paper uses the model GEMINI-E3 to simulate and assess the transition scenario to 2020 framed by the European Union in its “Energy–Climate” Directive, and it raises several issues in this connection. After a brief description of the model, the paper presents the results of the scenarios, mainly the values of the major indicators of carbon price — both in the ETS and in non-ETS sectors — and the welfare cost of the EU policy under the various configurations considered. While it is independent of the scenario in the ETS sector, in the non-ETS sector the value of carbon is very sensitive to the provisions of the Directive and in particular the option of resorting to the flexibility mechanisms. The welfare cost also varies significantly according to scenarios, and its value for the entire EU is more than double in the scenario closest to the Directive as compared to the least-cost one. The paper also addresses the very sensitive issue of carbon leakage and argues in favor of a new concept of “net leakage.” The analysis shows that while carbon leakage may affect some specific sectors, at the aggregate level it does not represent a real concern, with a magnitude of at most a few percent of GHG abatement by Annex B countries.

article i nfo The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO2 emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO2 emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO2 leakage and NOx and SO2 emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO2 leakage is associated with higher allowance prices, it is negatively related to CO2 prices if measured in percentage terms. On the other hand, SO2 and NOx emissions spillover increase in commensurate with CO2 allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy. Published by Elsevier B.V.

The climate-change agreement negotiated in Kyoto obliges the OECD countries to initiate the international effort of abating the anthropogenic greenhouse gas emissions. In the event that such an initiative is taken, the associated competitive pressures may induce significant offsetting increases in non-OECD emissions (a process generally known as leakage). The current models used to study these competitive effects have adopted an empirically inconsistent view of the world that international capital markets are perfectly integrated. To the extent that restrictions on the international mobility of capital affect regional investment decisions, it might be expected that the competitive impacts drawn from these models could significantly be altered. This paper addresses this issue. The paper suggests that these competitive effects are not really contingent on capital flows. With a regionally disaggregated dynamic model of the world economy, we show a quite robust result that carbon leakage is virtually unaffected by the presence of restrictions on the mobility of international capital.