Addressing Carbon Leakage: A toolkit

The document examines the challenge of carbon leakage, where carbon pricing in one jurisdiction drives emissions to others. It evaluates several policy responses: international carbon pricing frameworks, Border Carbon Adjustments (BCAs), carbon cost containment (such as free allocations in ETS), subsidies, and product standards. Each tool is analyzed based on its effectiveness in preventing leakage, its impact on decarbonization incentives, administrative complexity, and potential conflicts with WTO law or international principles like 'common but differentiated responsibilities'.

• Carbon leakage is an observed reality rather than just a theory, with research from the IMF and OECD showing average observed leakage rates of 25% and 13% respectively, meaning a 100-ton CO2 reduction in one country results in 13 to 25 additional tons of emissions elsewhere.
• A global carbon price or coordinated international agreement is the 'first-best' solution to eliminate leakage, but it faces severe political hurdles, including 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) effectively protect against import-based leakage but fail to protect export markets unless export rebates are used; however, such rebates can weaken decarbonization incentives and may be prohibited under WTO law.
• BCAs face a trade-off between coverage and administrative cost: extending coverage downstream to complex goods prevents more leakage but increases the cost and difficulty of tracking embodied carbon, while the actual risk of leakage is highest for basic commodities.
• Carbon cost-containment measures in Emissions Trading Systems (ETS), such as lenient baselines or free allocations, are the most common leakage tools; however, they can reduce the incentive for firms to decarbonize and lower public revenue.
• Subsidies can lower the cost of compliance and support the transition to clean technology, but they are costly, only available to governments with fiscal space, and act as complements rather than substitutes for other tools.
• Product standards can prevent leakage via imports by banning goods above a certain GHG intensity, but they are 'blunt instruments' that provide no incentive to improve beyond the set standard and may risk shutting off market access if set too high.

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} }