CARBON LEAKAGE UNDER INCOMPLETEENVIRONMENTAL REGULATION: AN INDUSTRY-LEVELAPPROACH

Carbon leakage is a major concern for policymakers involved with environmentalinitiatives such as the European Unions emissions trading scheme and similar cap-and-trade proposals in the United States, Australia, and elsewhere. This paperprovides a framework for understanding the drivers underlying carbon leakage atthe level of an individual sector in which only a subset of …rms is covered by suchregulation. It provides simple formulae to estimate leakage rates using informationon industry characteristics that is typically available to the analyst. Illustrativeestimates for the steel industry in the EU ETS suggest carbon leakage of 25–30%or (much) higher unless environmental-e¢ ciency improvements by regulated …rmsare substantial....