Revisiting Carbon Leakage

IMF Working Papers, August 6, 2021

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This paper estimates the carbon leakage rate across countries, a key parameter in international climate policy discussions including on border carbon adjustment, which remains subject to significant uncertainty.
Two main innovations are proposed:
- Exploit recently published data on sector-country-specific changes in energy prices to identify changes in domestic carbon emissions and other flows (rather than relying on historically limited variation in carbon prices or adherence to international climate agreements).
- Present a simple accounting framework to derive carbon leakage rates from reduced-form regressions, making results directly comparable to model-based estimates of carbon leakage.

Data focus:
- Sector-country-specific changes in energy prices as the identifying variation for changes in domestic carbon emissions and related flows.
Analytical contribution:
- A simple accounting framework that maps reduced-form regression results into carbon leakage rates, enabling direct comparability with model-based estimates.

Carbon leakage rates:
- Differ across countries.
- Could be larger than what existing estimates suggest.

Subject: Consumption, Energy prices, Energy pricing, Environment, Expenditure, Greenhouse gas emissions, National accounts, Prices
Keywords: carbon flow, carbon leakage, carbon leakage, CO2 content of trade, competitiveness, Consumption, emission constraint, emission spillovers, Energy prices, Energy pricing, Global, Greenhouse gas emissions, leakage rate, price data