Carbon leakage

Carbon leakage is a concept to quantify an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with stricter climate change mitigation policies. Carbon leakage is one type of spill-over effect. Spill-over effects can be positive or negative; for example, emission reductions policy might lead to technological developments that aid reductions outside of the policy area. Carbon leakage can be defined as "the increase in CO₂ emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries." It is expressed as a percentage, and can be greater or less than 100%. There is no consensus over the magnitude of long-term leakage effects.

Carbon leakage may occur for a number of reasons: if the climate policies of a country raise local costs, then another country with more relaxed policies may have a trading advantage. If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced. Moreover, if environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall. Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit. In the case of transboundary economic activities such as maritime transport, carbon leakage can take various forms—for example, ships may call at intermediate ports to circumvent climate regulations or increase their sailing speed outside regulated zones, resulting in higher overall emissions.