Trade Liberalization and Carbon Leakage

This paper examines the effect of trade liberalization on carbon leakage. We present quantitative estimates of carbon leakage under the Kyoto Protocol with and without freer trade by means of import tariff reductions agreed to in the Uruguay Round of multilateral trade negotiations. We find that under a plausible range of assumptions, the implementation of these import tariff reductions increases the overall rate of leakage, suggesting that previous studies may structurally have underestimated the rate of carbon leakage under the Kyoto Protocol. But we also find that the costs of abating the trade-induced leakage are modest relative to the welfare gains of freer trade. Analysis of the trade-induced carbon leakage shows large differences between leakage caused by reductions of import tariffs on energy goods and by reductions of import tariffs on non-energy goods. It also shows large differences in emission responses among developing country regions.

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