Carbon Leakage Revisited Based on Carbon Terms of Trade : Has the Kyoto Protocol Strengthened China's Comparative Advantage in Dirty Products?

This paper seeks to contribute to the debate on the carbon leakage phenomenon via the channel of competitiveness leakage by focusing on China’s bilateral trade. Based on a highly disaggregated database that includes 1,033 products and 117 trade partners from 1995 to 2012, we measure the environment-related trade performance with the Carbon Terms of Trade (CTT), whose time trends directly indicate whether China is gaining a comparative advantage in carbon-intensive products. Using a difference-in-difference model, we examine the Kyoto Protocol as an international climate policy quasi-natural experiment and ex-post evaluate its effect on China’s CTT. Our results confirm that the Kyoto Protocol ratification has increased China’s CTT by 26% (FE estimate, for the optimistic standpoint) or 47.3% (FE-IV estimate, for the pessimistic standpoint). Moreover, our results reveal heterogeneous effects of Kyoto-committed countries, depending on whether they have achieved their binding Kyoto targets. Thus, China’s comparative advantage in carbon-intensive products has been strengthened by the Kyoto commitment or the achievement of Kyoto targets, which is consistent with the fact that the carbon leakage phenomenon has played a crucial role in China’s international trade. The results have implications for both China’s climate policy and for current and future international climate policies