Carbon leakage in GreenREFORM


This paper examines global climate effects of national climate policies and optimal leakage-adjusted regulation. A method for estimating and integrating carbon leakage effects in the GreenREFORM model is presented.


Carbon leakage is at the front of the agenda for many policy makers. This poses a problem for national economic models, as they typically do not model foreign economies in detail, and as a result, cannot provide a reasonable estimate of any carbon leakage that arises as a consequence of national regulation. The purpose of this memo is threefold. First, we demonstrate the principles behind optimal regulation when policy makers have a domestic emission target and an aversion towards carbon leakage. We show how policy makers need to know how emissions abroad change when domestic net imports of different goods change. We call these key parameters leakage coefficients. Second, we develop an approach to estimating leakage coefficients. Third, we show that the approach we develop has broader applications: In fact, it can be used to estimate carbon leakage as a result of any policy that can be implemented in a national economic model. We demonstrate the approach using the large-scale national CGE-model of Denmark, GreenREFORM, in combination with simulations on the global GTAP-E model. We pay special attention to the issue of carbon leakage through the EU ETS system. A series of tests indicate that the method is well-suited to capture the leakage effects present in the global GTAP-E model. We do stress, however, that leakage effects are highly uncertain.