OECD Examines Competitiveness and Carbon Leakage Impacts in a Multiple Carbon Market Setting
19 September 2013: The Organisation for Economic Co-operation and Development (OECD) has released an Environment Working Paper titled 'Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets - A Modelling Assessment,' which examines the macroeconomic and sectoral competitiveness and carbon leakage impacts associated with a range of mitigation policy scenarios.
The scenarios depict a variety of hypothetical carbon markets with differing levels of linkages, coverage (i.e. number of countries participating, types of gases and sectors) and stringency of the carbon pricing policy across countries. The paper also investigates some policies to address competitiveness and carbon leakage issues, considering border carbon adjustments (BCAs) as well as direct and indirect (offset-based) linking of carbon markets.
The results show that in the presence of multiple carbon markets, competitiveness can decrease in countries that undertake climate policies, which also leads to carbon leakage. The negative sectoral competitiveness and leakage effects can be reduced when more countries act, more emission sources are covered, and climate mitigation policy is harmonized across countries.
The results also show that response policies, such as BCAs and linking of carbon markets, can address some of the competitiveness and carbon leakage issues. While BCAs are more effective than linking instruments in addressing domestic competitiveness concerns, linking instruments better preserve the welfare of countries that do not undertake climate policy.