Tackling Leakage in a World of Unequal Carbon Prices Carbon pricing effects on cost structures and trade flows of energy intensive industries

Under the current EU ETS the competitiveness and leakage effects of a unilateral climate policy for industry with trade exposure have been under discussion. While leakage is of major concern to climate policy makers, industry and industrial policy makers pronounce competitive disadvantages from carbon pricing. Leakage effects are becoming increasingly relevant for the next unilateral climate policy steps in a number of countries. Among the nations and regions embarking on a stricter climate policy, including ETS, are Australia, New Zealand, and regions and provinces within the United States and Canada. Carbon pricing gives room for leakages, either by a shift of consumption of carbon-intensive goods towards cheaper import substitutes, entailing more CO2-intensive production in regions without carbon pricing, or by a (re)location of industrial production to areas without carbon pricing. In a world of unequal carbon prices more certainty for effective emission reduction is needed, especially when it comes to investment in sectors with carbon-intensive production. A commitment to a longer term ETS and other national measures thus needs to consider remedies against leakage.