Production-based CO2 emission targets can give rise to carbon leakage, as firms relocate to countries without carbon policies. This column shows that Kyoto countries’ embodied CO2 imports have been increasing by about 50% since the Protocol was signed. Climate policies may have lead to additional carbon imports without sizeable domestic reductions. Consumption-based targets should therefore play a more prominent role in climate policies.
We find that carbon trade has increased from 1995 to 2005 by about 50% from about 3,000 MtC to 4,500 MtC. We also find that Kyoto countries typically are net importers of CO2. In 2005, France and the UK, for instance, both have “carbon imports” amounting to about 35% of their domestic carbon emissions. Even Kyoto countries such as Germany or Japan, with trade balances strongly in surplus are net importers of carbon. China, India, or South Africa, in contrast, have net exports of carbon amounting to up to 25% of their emissions.
So how can this problem be dealt with? Consumption-based carbon measures:
Production-based CO2 emission targets give rise to carbon leakage. Consumption-based targets do not have this shortcoming and should therefore play a more prominent role in climate policies. While more difficult to implement, they would make the current debate about border taxes entirely redundant, and therefore rid the world of a potential protectionist surge in green disguise.
And without carbon leakage, the border tax issue goes away.