The Problem Of Carbon Leakage Essay

766 Words 4 Pages
The definitions about carbon leakage by particular researchers vary slightly. Similarly, carbon leakage is the situation that the reduction of GHG emissions as a result of regional environment policy leads to GHG emissions increasing outside of the region. The region can be a state, a country, and any sizes of economic sectors. When government implements climate change policies, local firms are obliged to diminish their carbon emission to reach the standard. Some firms adopt technology or decrease output, while others are not reluctant to do so in concerns of high technology costs or profits reduction resulting from less outputs. They may transfer factories outside of the region to avoid environmental regulation. However, even firms reduce their production, it could be offset by production increases in other regions, which is the pure transfer of market shares. Also, when carbon price increases output prices in one region, consumption will shift to other goods like imported goods. In this case, total carbon emissions to the atmosphere don’t change. However, sometimes we may overestimate the damage of leakage because of the ignorance of negative leakage from substitution effect. It means the constrained sector tends to use more clean inputs instead of carbon emission inputs, and reduces available resources in non-constrained sector. As the result, carbon emission is reduced in non-constrained sector and offset part of the positive leakage. To understand the extent of carbon…

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