Addressing Carbon Leakage

The document examines the phenomenon of carbon leakage, where carbon pricing in one jurisdiction leads to increased emissions in others. It evaluates several mitigation tools, including Border Carbon Adjustments (BCAs), carbon cost containment measures (such as free allocations in ETS), subsidies, and product standards, while noting the political and practical hurdles of achieving a coordinated global carbon price.

• 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.
• While a global carbon price or coordinated international framework would be the most effective solution to eliminate leakage, such agreements face significant 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) can protect against import-based leakage but may fail to protect export markets unless export rebates are provided; however, such rebates can weaken decarbonization incentives and may violate WTO laws.
• BCAs face administrative challenges regarding value chain coverage; extending coverage downstream increases complexity and cost, while the actual risk of leakage typically diminishes further down the value chain as most carbon is embodied in basic commodities.
• Carbon cost-containment measures in Emissions Trading Systems (ETS), such as free allocations or performance benchmarks, protect firms from the full cost of carbon to prevent leakage, but may weaken incentives to decarbonize if firms expect low future values for carbon credits.
• Subsidies can reduce the cost of compliance by supporting the adoption of cleaner technologies, but they are costly, only available to governments with sufficient fiscal space, and are best used as complements rather than substitutes for other tools.
• Product standards can prevent leakage via imports by banning goods that exceed specific GHG intensity levels, but they are blunt instruments that offer no incentive to improve beyond the set standard and do not protect export markets.

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} }