Options for Policy-Makers Addressing Competitiveness, Leakage and Climate Change

The report examines the economic and environmental impacts of carbon pricing on industrial competitiveness and the risk of carbon leakage, where emissions shift to jurisdictions with less stringent policies. It analyzes six policy options—border taxes, mandatory allowance purchases, embedded carbon product standards, aid to industry, free allowances, and sectoral approaches—concluding that while border carbon adjustments (BCAs) are theoretically more effective at reducing leakage in specific sectors, they face significant technical, administrative, and WTO legal challenges. The document emphasizes that only a small fraction of GDP (typically less than 1%) is truly at risk, primarily in energy-intensive, trade-exposed sectors like cement, steel, and aluminum.

• Carbon leakage is primarily a risk when production moves from a region with an absolute cap on greenhouse gas emissions to one without such a cap.
• Only a small portion of economic activity, generally estimated at no more than 1% of GDP, is susceptible to significant production cost increases due to differing carbon costs between countries.
• The sectors most vulnerable to competitiveness loss and carbon leakage include lime, cement, clinker kilns, primary aluminum smelters, integrated steel mills, electric-arc furnace ovens, and certain chemicals.
• Empirical evidence from the first phase of the EU ETS (2005-2007) showed no significant carbon leakage in the steel, cement, aluminum, and refinery sectors, likely due to the overallocation of free allowances.
• Border Carbon Adjustments (BCAs) are more effective than free allowances at reducing leakage in controlled sectors, but their overall macroeconomic effectiveness is questioned because they may trigger the 'fossil fuel-price leakage channel'.
• Measuring embedded carbon for BCAs is technically difficult due to the need for complex assumptions regarding system boundaries, electricity emission factors, and the lack of high-quality, audited data.
• Under WTO rules, BCAs may be legally permissible if they are justified under GATT Article XX general exceptions as necessary to protect human, animal or plant life or for the conservation of exhaustible natural resources, provided they are not applied as arbitrary discrimination.
• The European Union's criteria for a sector to be at 'significant risk of carbon leakage' include a production cost increase exceeding 5% of Gross Value Added and a trade intensity (exports and imports divided by turnover and imports) exceeding 10%.
• The U.S. Waxman-Markey bill proposed output-based rebates for 'vulnerable' sectors, which effectively creates an intensity-based cap and reduces the economic incentive for firms to abate emissions.

APA

Wooders, P., Reinaud, J., & Cosbey, A. (2009). Options for Policy-Makers Addressing Competitiveness, Leakage and Climate Change. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/bali_2_copenhagen_bcas.pdf

Chicago

Wooders, Peter, Julia Reinaud, and Aaron Cosbey. Options for Policy-Makers Addressing Competitiveness, Leakage and Climate Change. International Institute for Sustainable Development, 2009. https://www.iisd.org/system/files/publications/bali_2_copenhagen_bcas.pdf.

Wikipedia

{{cite report |last1=Wooders |first1=Peter |last2=Reinaud |first2=Julia |last3=Cosbey |first3=Aaron |title=Options for Policy-Makers Addressing Competitiveness, Leakage and Climate Change |publisher=International Institute for Sustainable Development |date=October 2009 |url=https://www.iisd.org/system/files/publications/bali_2_copenhagen_bcas.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{wooders2009options, author = {Wooders, Peter and Reinaud, Julia and Cosbey, Aaron}, title = {{Options for Policy-Makers Addressing Competitiveness, Leakage and Climate Change}}, institution = {International Institute for Sustainable Development}, year = {2009}, month = oct, url = {https://www.iisd.org/system/files/publications/bali_2_copenhagen_bcas.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }