Addressing Carbon Leakage: A toolkit

This toolkit by the International Institute for Sustainable Development (IISD) examines policy options to address carbon leakage—the displacement of production and emissions to countries with lower climate ambition. It analyzes the trade-offs of international frameworks, Border Carbon Adjustments (BCAs), carbon cost containment, subsidies, and product standards, noting that while carbon pricing coverage grew to 24% of emissions in 2024, price divergence continues to drive leakage risks.

• Carbon leakage is an observed phenomenon rather than just a theoretical risk, with recent research from the International Monetary Fund and Organisation for Economic Co-Operation showing average observed leakage rates of 25% and 13% respectively.
• A global carbon price or coordinated international agreement is considered the 'first-best' solution to eliminate price divergences that drive leakage, but such frameworks face severe political hurdles. These include conflicts with the Paris Agreement's principle of independent national ambition and the principle of "common but differentiated responsibilities and respective capabilities."
• Border Carbon Adjustments (BCAs) levy charges on imports to align them with domestic carbon prices. While effective against import leakage, they do not protect export market share unless export rebates are provided; however, such rebates may be viewed as prohibited subsidies under WTO law and can weaken decarbonization incentives.
• BCAs face administrative challenges regarding value chain calibration and 'resource shuffling,' where cleaner production is exported to BCA jurisdictions while dirtier production is sent elsewhere without changing overall GHG intensity.
• Carbon cost containment, particularly in Emissions Trading Schemes (ETS), protects at-risk sectors by making operators liable only for emissions above a certain baseline. This approach is used in the EU, UK, Korea, and Canada's Output-Based Pricing System (OBPS), though it may reduce the incentive to decarbonize if firms expect low future credit values.
• Subsidies, such as grants or tax credits, can lower the cost of compliance and reduce leakage risk by supporting decarbonization. For example, Canada provided a CAD 420 million subsidy to Algoma Steel in 2021 to phase out coal-fired steelmaking. However, subsidies are costly and only available to governments with sufficient fiscal space.
• Product standards act as technical regulations banning goods that exceed specific GHG intensity levels. While they prevent import leakage, they are described as a 'blunt instrument' that provides no incentive to improve beyond the minimum standard and may risk shutting off market access if standards are set at unachievable levels.

APA

Cosbey,, A. B. (2024). Addressing Carbon Leakage: A toolkit. International Institute for Sustainable Development. https://www.iisd.org/articles/deep-dive/addressing-carbon-leakage-toolkit

Chicago

Cosbey,, Antoine Bonnet,Aaron. Addressing Carbon Leakage: A toolkit. International Institute for Sustainable Development, 2024. https://www.iisd.org/articles/deep-dive/addressing-carbon-leakage-toolkit.

Wikipedia

{{cite report |last1=Cosbey, |first1=Antoine Bonnet,Aaron |title=Addressing Carbon Leakage: A toolkit |publisher=International Institute for Sustainable Development |date=5 December 2024 |url=https://www.iisd.org/articles/deep-dive/addressing-carbon-leakage-toolkit |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{cosbey2024addressing, author = {Cosbey,, Antoine Bonnet,Aaron}, title = {{Addressing Carbon Leakage: A toolkit}}, institution = {International Institute for Sustainable Development}, year = {2024}, month = dec, url = {https://www.iisd.org/articles/deep-dive/addressing-carbon-leakage-toolkit}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }