CARBON LEAKAGE

Carbon leakage is the effect that regulation of emissions in one country/sector has on the emissions in other countries/sectors that are not subject to the same regulation.

Leakage effects can be both negative (i.e. increasing the effectiveness of reducing overall emissions) and positive (reducing the effectiveness of reducing overall emissions). Negative leakages, which are desirable, are usually referred to as "spill-over".

According to Goldemberg et al.. (1996, p.28), short-term leakage effects need to be judged against leakage effects in the long-term. A policy that, for example, saw a carbon taxes set only in developed countries might lead to leakage of emissions to developing countries.

However, a desirable negative leakage could occur due to a lowering in demands of coal, oil, and gas from the developed countries and thus the world prices. This will lead to developing countries being able to afford more of any hydrocarbon fuel type, thus being able to substitute more oil or gas for coal, in effect lowering their national emissions. In the long-run, however, if the transfer of less polluting technologies is delayed, this substitution by income effects might have no long-term benefit.

Carbon leakage is central to the discussion on climate policy, given the confluence of issues that are currently being debated, including the 2030 Energy and Climate Framework and the review of the EU carbon leakage list by 2014.