Addressing Carbon Leakage

This policy brief by the International Institute for Sustainable Development (IISD) examines carbon leakage—the displacement of production and emissions to countries with lower climate ambition—and evaluates a toolkit of policy responses including Border Carbon Adjustments (BCAs), cost-containment measures, subsidies, and product standards.

• Carbon leakage is an observed reality rather than just a theoretical risk, with recent research from the IMF and OECD showing average observed leakage rates of 25% and 13%, respectively. This means a 100-ton reduction in CO2 in one country can result in 13 to 25 additional tons of emissions in another.
• While a global carbon price or coordinated international framework would be the 'first-best' solution to eliminate leakage, such agreements 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 equalize carbon pricing between jurisdictions. While effective against import leakage, they may not protect domestic exports in foreign markets unless export rebates are provided, which can weaken decarbonization incentives and potentially violate WTO law.
• BCAs face administrative challenges regarding value chain coverage 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 measures, common in Emissions Trading Systems (ETS), protect industries by using performance benchmarks or free allocations so firms only pay for emissions above a certain baseline. Examples include Canada's Output-Based Pricing System (OBPS) and the Korean ETS.
• Subsidies can mitigate leakage by lowering the cost of decarbonization for specific producers, such as the CAD 420 million grant given to Algoma Steel in 2021. However, they are costly, partial tools available only to governments with significant fiscal space.
• Product standards act as technical regulations banning goods that exceed specific GHG intensity levels. While they prevent import leakage, they are considered 'blunt' instruments that provide no incentive to improve beyond the minimum standard and may risk shutting off market access if set too high.

APA

Bonnet, A., & Cosbey, A. (2024). Addressing Carbon Leakage. International Institute for Sustainable Development. https://www.iisd.org/system/files/2024-12/carbon-leakage-toolkit.pdf

Chicago

Bonnet, Antoine, and Aaron Cosbey. Addressing Carbon Leakage. International Institute for Sustainable Development, 2024. https://www.iisd.org/system/files/2024-12/carbon-leakage-toolkit.pdf.

Wikipedia

{{cite report |last1=Bonnet |first1=Antoine |last2=Cosbey |first2=Aaron |title=Addressing Carbon Leakage |publisher=International Institute for Sustainable Development |date=December 2024 |url=https://www.iisd.org/system/files/2024-12/carbon-leakage-toolkit.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{bonnet2024addressing, author = {Bonnet, Antoine and Cosbey, Aaron}, title = {{Addressing Carbon Leakage}}, institution = {International Institute for Sustainable Development}, year = {2024}, month = dec, url = {https://www.iisd.org/system/files/2024-12/carbon-leakage-toolkit.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }