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Carbon leakage in a fragmented climate regime: The dynamic response of global energy markets

Tabaré Arroyo-Currás, Nico Bauer, Elmar Kriegler, Valeria Jana Schwanitz, Gunnar Luderer, Tino Aboumahboub, Anastasis Giannousakis and Jérôme Hilaire

Technological Forecasting and Social Change, 2015, vol. 90, issue PA, 192-203

Abstract: As a global climate agreement has not yet been achieved, a variety of national climate policy agendas are being pursued in different parts of the world. Regionally fragmented climate policy regimes are prone to carbon leakage between regions, which has given rise to concerns about the environmental effectiveness of this approach. This study investigates carbon leakage through energy markets and the resulting macro-economic effects by exploring the sensitivity of leakage to the size and composition of pioneering regions that adopt ambitious climate action early on. The study uses the multi-regional energy–economy–climate model REMIND 1.5 to analyze the implications of Europe, China and the United States taking unilateral or joint early action. We find that carbon leakage is the combined effect of fossil fuel and capital market re-allocation. Leakage is limited to 15% of the emission reductions in the pioneering regions, and depends on the size and composition of the pioneering coalition and the decarbonization strategy in the energy sector. There is an incentive to delay action to avoid near-term costs, but the immediate GDP losses after acceding to a global climate regime can be higher in the case of delayed action compared to early action. We conclude that carbon leakage is not a strong counter-argument against early action by pioneers to induce other regions to adopt more stringent mitigation.

Keywords: Climate policy; Copenhagen pledges; Carbon leakage; Fossil energy markets (search for similar items in EconPapers)
JEL-codes: F47 Q54 Q56 (search for similar items in EconPapers)
Date: 2015
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