The impact of climate legislation on trade-related carbon emissions, 1997–2017

There is considerable anxiety about the international impact of unilateral action on climate change. Environmentalists are concerned that it leads to ‘carbon leakage’, that is, the migration of high-emissions activities from relatively tight regulatory environments to more lenient jurisdictions. Industry representatives worry about competitiveness, in terms of the associated loss of jobs and market share. However, despite 30 years of academic analysis, there is little consensus on the likely magnitude, or indeed the sign, of carbon leakage.

This paper provides an empirical ex post account of the impact of national climate change policy and legislation on international carbon emissions between 1997 and 2017, using data from the Climate Change Laws of the World database. It uses the difference between countries’ production emissions (the amount of carbon emitted within country boundaries) and consumption emissions (the amount of carbon embedded in national consumption) to derive the carbon trade balance of 98 countries – in other words, the difference between their carbon imports and exports.

The paper finds that recent legislation (climate laws passed in the last three years) reduces production emissions more than consumption emissions, while older laws (past more than three years ago) have a bigger impact on consumption emissions. The combined effect of these changes on net carbon imports is very small. The paper finds no evidence that domestic climate legislation has increased international carbon leakage over the past two decades. Indeed, in high-income countries the long-run leakage rate may have been negative.

Key points for decision-makers

• There is no empirical evidence that climate change policy and legislation over the past 20 years has led to the ‘offshoring’ of carbon emissions. This finding is consistent with earlier empirical work on the competitiveness effect of carbon policies on firms.
• Carbon leakage may occur through a number of channels. The reduced demand for fossil fuels could lower international prices and lead to a rebound effect. Changes in the terms of trade may reduce high-carbon exports and increase imports. But emissions abroad may also be affected by policy diffusion (the emulation of successful carbon policies), technology spillovers (the international adoption of clean technology) and fuel substitution effects (if unilateral action changes the relative price of clean and dirty fuels).
• The evidence suggests that these latter effects have been particularly prominent in high-income countries, leading to negative leakage effects over the long term. Deliberate policies to reduce negative leakage (such as targeted subsidies or the free allocation of emissions permits) may also have played a role.
• Leakage rates also depend crucially on the difference in ambition between domestic climate policy and carbon policies abroad. The best way to address leakage concerns is therefore to level up climate ambitions in all countries.
• The global process of ‘ratcheting up’ Nationally Determined Contributions to the Paris Agreement should ensure that international climate ambitions are increasingly aligned with the Paris objectives and the international playing field becomes level.