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© 2021 International Monetary Fund
WP/21/207
IMF Working Paper
European Department
Revisiting Carbon Leakage Prepared by Florian Misch and Philippe Wingender1
Authorized for distribution by Peter Dohlman
August 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
This paper estimates the carbon leakage rate across countries, arguably a key parameter in the international climate policy discussion including on border carbon adjustment, but which remains subject to significant uncertainty. We propose innovations along two lines. First, we exploit recently published data on sector-country-specific changes in energy prices to identify changes in domestic carbon emissions and other flows (rather than the historically limited variation in carbon prices or adherence to international climate agreements). Second, we present a simple accounting framework to derive carbon leakage rates from reduced-form regressions in contrast to existing papers, thereby making our results directly comparable to model-based estimates of carbon leakage. We show that carbon leakage rates differ across countries and could be larger than what existing estimates suggest.
JEL Classification Numbers: F180, Q540, Q560
Keywords: carbon leakage, CO2 content of trade, emission spillovers, competitiveness
Author’s E-Mail Address: fmisch@imf.org and pwingender@imf.org
Contents
Abstract
I. Introduction
II. Data
III. Empirical Results
A. Effects on Carbon Emissions and Carbon Embodied in Trade Flows
B. Heterogeneity Across Sectors and Countries
C. Other Effects of Changes in Energy Prices
IV. Carbon Leakage Rates
A. Conceptual Framework
B. Country-Specific Carbon Leakage Rates
V. Conclusions
References
Tables
1. Impact of Energy Prices on Carbon Flows
2. Impact of Energy Prices on Carbon Flow: Country Heterogeneity
3. Impact of Energy Prices on Carbon Flow: Industry Heterogeneity
4. Energy Prices and Energy Use, CO2 Intensity and Energy Mix
5. Energy Prices and Indicators of Competitiveness
6. Country-Specific Leakage Rates
Figure
1. Leakage Rates
Appendices
I. Summary of the Literature
II. Stylized Facts At the Sector Level
We thank Mehdi Benatiya Andaloussi, Craig Beaumont, Simon Black, John Bluedorn, Oya Celasun, Enrica Detragiache, Romain Duval, Peter Dohlman, Dora Iakova, Martin Kaufman, Michael Keen, Ian Parry, James Roaf, Li Zengfor excellent comments on earlier versions of this paper. Hannah Jung, Dilcia Noren and Tan Wan provided research assistance.