Carbon leakages a general equilibrium view

Authors: JeanMarc Burniaux Joaquim Oliveira Martins

Publish Date: 2011/01/09

Volume: 49, Issue: 2, Pages: 473-495

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Abstract

The effectiveness of unilateral action to curb carbon emissions has been dismissed because of possible “carbon leakages” this referring to the rise of emissions in nonparticipating countries This paper offers a general equilibrium GE exploration of the key mechanisms and factors underlying the size of carbon leakages We developed a tworegion twogoods simplified GE framework incorporating three types of fossil fuels coal oil and lowcarbon energy international trade and capital mobility The model was designed to make tractable extensive multidimensional sensitivity analysis The results suggest that the coal supply elasticity plays a critical role while substitution elasticities between traded goods and international capital mobility appear relatively less influential The shape of the production function also matters for the size of the leakages Confirming the results obtained with large computable GE models for a wide range of parameters’ values carbon leakages appear to be small Therefore the argument that unilateral carbon abatement action taken by a large group of countries such as the Annex 1 group is flawed by significant carbon leakages is not supported by our sensitivity analysis The likelihood of small leakages favours in fact the formation of a worldwide coalition to stabilise climate changeThe authors want to thank Graciela Chichilnisky Jorgen Elmeskov Peter Sturm and late Alan Manne for discussions and comments on early versions of this work Anonymous referees also provided very useful suggestions The views expressed are those of the authors and do not necessarily reflect those of the OECD or its Member countries

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