A Numerical Investigation of the Potential for Negative Emissions Leakage

Leakage of greenhouse gas emissions— increased emissions in unconstrained regions due to regulations in other regions— undermines the effectiveness of sub-global climate regulations, reduces incentives for unilateral climate initiatives, and can result in distortionary trade measures (Winchester, 2012). These concerns are expressed in measures to reduce leakage included in the EU Emissions Trading Scheme and draft legislation in the US (the now defunct Waxman-Markey bill). Two sources of leakage include changes in fossil-fuel prices and trade flows (Carbone, Helm and Rutherford, 2009). Leakage via fossil-fossil price effects occurs when reduced energy demand in constrained regions decreases fuel prices and increases fuel use in unconstrained regions. Trade changes contribute to leakage when production increases in unconstrained regions as a result of increased exports to and reduced imports from constrained regions. Opposing the conventional view, using a theoretical general equilibrium framework, Fullerton, Karney and Baylis (2011) [FKB] show that emissions restrictions may decrease emissions elsewhere due to the abatement resource effect (ARE). The authors assert that negative leakage via the ARE occurs when increased demand for capital and labor to replace fossil fuels in carbon-