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

==== 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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