International Trade and Carbon Leakage: Working Paper 2013-08

Working Paper
December 19, 2013

By Bruce Arnold

Under a broad-based carbon tax or cap-and-trade program, some of the reduction in U.S. carbon dioxide emissions would probably be offset by increases in foreign emissions that would not otherwise have occurred, a phenomenon known as carbon leakage. Industries with substantial total emissions, high trade ratios, and high emission intensities are the most likely to generate substantial leakage. Therefore, the industries most likely to be sources of significant leakage through trade in their products are the chemical; primary metal (such as aluminum and iron and steel); and, to a lesser extent, the nonmetallic mineral products (cement, lime, gypsum, and glass) and petroleum and coal products (refining and coke production) industries. Under narrower programs targeting particular industries, significant leakage would occur in fewer industries.

Studies of economywide programs have produced estimates of leakage ranging from 1 percent to 23 percent of the emission reduction the programs would achieve in the countries implementing them. However, those estimates may not apply to future proposals, and estimating leakage is difficult and subject to considerable uncertainty.