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Addressing Competiveness and Carbon Leakage Impacts Arising From Multiple Carbon Markets: A Modelling Assessment

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E. Lanzi
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Differences in climate policy approaches may have impacts on the relative competitiveness of domestic sectors between countries, and on the environmental effectiveness through carbon leakage. This paper examines the macroeconomic and sectoral competitiveness and carbon leakage impacts associated with a range of stylised mitigation policy scenarios. It also looks at various policies to address competitiveness and carbon leakage issues. The analysis considers border carbon adjustments (BCAs) as well as direct and indirect (offset-based) linking of carbon markets.  The results of the study indicate that in the presence of multiple carbon markets, competitiveness can decrease in countries that undertake climate policies, also leading to carbon leakage. The negative sectoral competitiveness and leakage effects can be reduced when the climate mitigation policy is harmonised across countries. Response policies can address some, but not all, of the competitiveness and carbon leakage issues.