Carbon leakage in a fragmented climate regime: The dynamic response of global energy markets

Carbon leakage in a fragmented climate regime: The dynamic response of global energy markets

by Tabaré Arroyo Currás, Nico Bauer, Elmar Kriegler, Valeria Jana Schwanitz, Gunnar Luderer, Tino Aboumahboub, Anastasis Gianousakis and Jérôme Hilaire

(published in the International Journal Technology Forecasting and Social Change, November the 10th 2013; available on-line at ElSevier: http://www.sciencedirect.com/science/article/pii/S0040162513002606)

 

Highlights

•We analyzed carbon leakage of climate policies in a fragmented climate policy regime.
•Carbon leakage is limited to 16% of the emission reductions in pioneering regions.
•We study carbon leakage resulting from fossil fuel and capital market re-allocation.
•Leakage depends on the size and time development of the pioneering climate action.

Abstract

As a global climate agreement has not yet been achieved, a variety of national climate policy agendas are being pursued in different parts of the world. Regionally fragmented climate policy regimes are prone to carbon leakage between regions, which has given rise to concerns about the environmental effectiveness of this approach. This study investigates carbon leakage through energy markets and the resulting macro-economic effects by exploring the sensitivity of leakage to the size and composition of pioneering regions that adopt ambitious climate action early on. The study uses the multi-regional energy–economy–climate model REMIND 1.5 to analyze the implications of Europe, China and the United States taking unilateral or joint early action. We find that carbon leakage is the combined effect of fossil fuel and capital market re-allocation. Leakage is limited to 15% of the emission reductions in the pioneering regions, and depends on the size and composition of the pioneering coalition and the decarbonization strategy in the energy sector. There is an incentive to delay action to avoid near-term costs, but the immediate GDP losses after acceding to a global climate regime can be higher in the case of delayed action compared to early action. We conclude that carbon leakage is not a strong counter-argument against early action by pioneers to induce other regions to adopt more stringent mitigation.

 

Keywords

  • Climate policy;
  • Copenhagen pledges;
  • Carbon leakage;
  • Fossil energy markets

Netzahualcóyotl Arroyo

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