Individual countries are in the process of legislating responses to the challenges posed by climate change. The prospect of rising carbon prices raises concerns in these nations about the effects on the competitiveness of their own energy-intensive industries and the potential for carbon leakage, particularly leakage to emerging economies that lack comparable regulation. In response, certain developed countries are proposing controversial trade-related measures and allowance allocation designs to complement their climate policies. Missing from much of the debate on trade-related measures is a broader understanding of how climate policies implemented unilaterally (or subglobally) affect all countries in the global trading system. Arguably, the largest impacts are from the targeted carbon pricing itself, which generates macroeconomic effects, terms-of-trade changes, and shifts in global energy demand and prices; it also changes the relative prices of certain energy-intensive goods. This paper studies how climate policies implemented in certain major economies (the European Union and the United States) affect the global distribution of economic and environmental outcomes, and how these outcomes may be altered by complementary policies aimed at addressing carbon leakage.
As nations craft domestic responses to climate change, questions emerge over whether their own energy-intensive industries will be able to compete with those of countries that don’t price carbon. From an environmental perspective, concerns exist about whether efforts to reduce domestic emissions will be counterbalanced by emissions from unregulated nations, a problem commonly known as leakage.
Responding to these issues, some policymakers have proposed including trade-related provisions to climate legislation, designed to address the viability of carbon-constrained domestic industries and ensure, to some extent, the environmental integrity of such policies. Developing countries, however, worry that such measures will unfairly target their energy-intensive industries with punitive trade barriers.
In The Global Effects of Subglobal Climate Policies, RFF Senior Fellow Carolyn Fischer and coauthors Christoph Bohringer and Knut Einar Rosendahl examine the interactions of subglobal climate policies and the global trading system.
According to the authors, subglobal climate policies undeniably reach beyond their respective borders. “Developed countries should understand that most developing nations do not actually gain economically from the former’s efforts to reduce greenhouse gas emissions. At the same time, developing countries should recognize that their sectors targeted specifically by antileakage policies do not necessarily lose, compared with a world without any climate policies.”