Editing IPCC:AR6/WGIII/Chapter-13 (section)

=== 13.6.6 International Interactions of National Mitigation Policies ===

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One country’s mitigation policy can impact other countries in various ways including changes in their GHG emissions (leakage), creation of markets for emission reduction credits, technology development and diffusion (spillovers), and reduction in the value of their fossil fuel resources.

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==== 13.6.6.1 Leakage Effects ====

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Compliance with a mitigation policy can affect the emissions of foreign sources via several channels over different time scales ( [[#Zhang--2017|Zhang and Zhang 2017]] ) (Box 13.13 ). The effects may interact and yield a net increase or decrease in emissions. The leakage channel that is of most concern to policymakers is adverse international competitiveness impacts from domestic climate policies.

In principle, implementation of a mitigation policy in one country creates an incentive to shift production of tradable goods whose costs are increased by the policy to other countries with less costly emissions limitation policies ( [[IPCC:Wg3:Chapter:Chapter-12#12.6.3|Section 12.6.3]] ). Such ‘leakage’ could to some extent negate emissions reductions in the first country, depending on the relative emissions intensity of production in both countries.

''Ex ante'' modelling studies typically estimate significant leakage for unilateral policies to reduce emissions due to production of emissions intensive products such as steel, aluminium, and cement ( [[#Carbone--2017|Carbone and Rivers 2017]] ). However, the results are highly dependent on assumptions and typically do not reflect policy designs specifically aimed at minimising or preventing leakage ( [[#Fowlie--2018|Fowlie and Reguant 2018]] ).

Numerous ''ex post'' analyses, mainly for the EU ETS, find no evidence of any or significant adverse competitiveness impacts and conclude that there was consequently no or insignificant leakage ( ''medium evidence'' , ''medium agreement'' ) ( [[#Branger--2016|Branger et al. 2016]] ; [[#Haites--2018|Haites et al. 2018]] ; [[#Koch--2019|Koch and Basse Mama 2019]] ; [[#FSR%20Climate--2019|FSR Climate 2019]] ; [[#aus%20dem%20Moore--2019|aus dem Moore et al. 2019]] ; [[#Venmans--2020|Venmans et al. 2020]] ; [[#Kuusi--2020|Kuusi et al. 2020]] ; [[#Verde--2020|Verde 2020]] ; [[#Borghesi--2020|Borghesi et al. 2020]] ). This is attributed to large allocations of free allowances to emissions-intensive, trade-exposed sources, relatively low allowance prices, the ability of firms in some sectors to pass costs on to consumers, energy’s relatively low share of production costs, and small but statistically significant effects on innovation ( [[#Joltreau--2019|Joltreau and Sommerfeld 2019]] ). Few carbon taxes apply to emissions-intensive, trade-exposed sources ( [[#Timilsina--2018|Timilsina 2018]] ), so competitiveness impacts usually are not a particular concern.

Policies intended to address leakage include a border carbon adjustment ( [[#Ward--2019|Ward et al. 2019]] ; [[#Ismer--2020|Ismer et al. 2020]] ). a border carbon adjustment (BCA) imposes costs – a tax or allowance purchase obligation – on imports of carbon-intensive goods equivalent to those borne by domestic products possibly mirrored by rebates for exports ( [[#Böhringer--2012|Böhringer et al. 2012]] ; [[#Fischer--2012|Fischer and Fox 2012]] ; [[#Zhang--2012|Zhang 2012]] ; [[#Böhringer--2017c|Böhringer et al. 2017c]] ) (Chapter 14). A BCA faces the practical challenge of determining the carbon content of imports ( [[#Böhringer--2017a|Böhringer et al. 2017a]] ) and the design needs to be consistent with WTO rules and other international agreements ( [[#Cosbey--2019|Cosbey et al. 2019]] ; [[#Mehling--2019|Mehling et al. 2019]] ). Model estimates indicate that a BCA reduces but does not eliminate leakage ( [[#Branger--2014|Branger and Quirion 2014]] ). No BCA has yet been implemented for international trade although such a measure is currently under consideration by some governments.

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==== 13.6.6.2 Market for Emission Reduction Credits ====

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A mitigation policy may allow the use of credits issued for emission reductions in other countries for compliance purposes (see also [[#13.6.3.4|Section 13.6.3.4]] on offset credits and [[IPCC:Wg3:Chapter:Chapter-14|Chapter 14]] on international credit mechanisms). Creation of international markets for emission reduction credits tends to benefit other countries through financial flows in return for emissions credit sales ( ''medium evidence'' , ''hi'' ''gh agreement'' ).

The EU, New Zealand and Switzerland allowed participants in their emissions trading systems to use credits issued under the Kyoto Protocol mechanisms, including the Clean Development Mechanism (CDM), for compliance. From 2008 through 2014, participants used 3.76 million imported credits for compliance of which 80% were CDM credits ( [[#Haites--2016|Haites 2016]] ). [[#footnote-002|3]] Use of imported credits has fallen to very low levels since 2014 ( [[#World%20Bank--2014|World Bank 2014]] ; [[#Shishlov--2016|Shishlov et al. 2016]] ). [[#footnote-001|4]]

The Clean Development Mechanism (CDM) is the world’s largest offset programme (Chapter 14). From 2001 to 2019 over 7500 projects with projected emission reductions in excess of 8000 MtCO 2 -eq were implemented in 114 developing countries using some 140 different emissions reduction methodologies ( [[#UNFCCC--2012|UNFCCC 2012]] ; [[#UNEP%20DTU%20Partnership--2020|UNEP DTU Partnership 2020]] ). Credits reflecting over 2000 MtCO 2 -eq of emission reductions by 3260 projects have been issued. To address additionality and other concerns the CDM Executive Board frequently updated its approved project methodologies.

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==== 13.6.6.3 Technology Spillovers ====

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Mitigation policies stimulate low-carbon R&amp;D by entities subject to those policies and by other domestic and foreign entities ( [[#FSR%20Climate--2019|FSR Climate 2019]] ). Policies to support technology development and diffusion tend to have positive spillover effects between countries ( ''medium evidence'' , ''high agreement'' ) ( [[IPCC:Wg3:Chapter:Chapter-16#16.3|Section 16.3]] ) ''.''

Innovation activity in response to a mitigation policy varies by policy type ( [[#Jaffe--2002|Jaffe et al. 2002]] ) and stringency ( [[#Johnstone--2012|Johnstone et al. 2012]] ). In addition, many governments have policies to stimulate R&amp;D, further increasing low-carbon R&amp;D activity by domestic researchers. Emitters in other countries may adopt some of the new low-carbon technologies thus reducing emissions elsewhere. Technology development and diffusion is reviewed in Chapter 16.

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==== 13.6.6.4 Value of Fossil Fuel Resources ====

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Fossil fuel resources are a significant source of exports, employment and government revenues for many countries. The value of these resources depends on demand for the fuel and competing supplies in the relevant international markets. Discoveries and new production technologies reduce the value of established resources. Mitigation policies that reduce the use of fossil fuels also reduce the value of these resources. A single policy in one country is unlikely to have a noticeable effect on the international price, but similar policies in multiple countries could adversely affect the value of the resources. For fossil fuel exporting countries, mitigation policies consistent with the Paris Agreement goals could result in greater costs from changes in fossil fuel prices due to lower international demand than domestic policy costs ( ''medium evidence'' , ''high agreement'' ) ( [[#Liu--2020|Liu et al. 2020]] ).

The impact on the value of established resources will be mitigated, to some extent, by the reduced incentive to explore for and develop new fossil fuel supplies. Nevertheless, efforts to lower global emissions will mean substantially less demand for fossil fuels, with the majority of current coal reserves and large shares of known gas and oil reserves needing to remain unused, with great diversity in impacts between different countries ( [[#McGlade--2015|McGlade and Ekins 2015]] ) (Chapters 3, 6, 15).

Estimates of the potential future loss in value differ greatly. There is uncertainty about remaining future fossil fuel use under different mitigation scenarios, as well as future fossil fuel prices depending on extraction costs, market structures and policies. Estimates of total cumulative fossil fuel revenue lost range between 5–67 trillion USD ( [[#Bauer--2015|Bauer et al. 2015]] ) with an estimate of the net present value of lost profit of around 10 trillion USD ( [[#Bauer--2016|Bauer et al. 2016]] ). Policies that constrain supply of fossil fuels in the context of mitigation objectives could limit financial losses to fossil fuel producers (Chapter 14).

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