The situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries.
Carbon leakage occurs when there is an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with a strict climate policy. Carbon leakage may occur for a number of reasons:
* If the emissions policy of a country raises local costs, then another country with a more relaxed policy 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.
* 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. There is no consensus over the magnitude of long-term leakage effects. This is important for the problem of climate change. 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 is 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%. Carbon leakage may occur through changes in trading patterns, and that is sometimes measured as the balance of emissions embodied in trade (BEET).
