Carbon leakage in a world of asymmetric carbon prices: Evidence from emissions embodied in trade and effective carbon prices.

Climate change is a global challenge, yet countries are still making efforts through unilateral climate policies. This raises concerns about carbon leakage, where the emissions reduced in the abating countries are offset by those increased in the unregulated regions, undermining the efficacy of climate policies. In a world of asymmetric carbon prices and an era of global value chains, it is critical to investigate the scale and mechanism of carbon leakage to examine the mitigation effects of climate policies. This study investigates the impact of asymmetric carbon pricing on emissions embodied in global trade, using a dataset of bilateral trade-related carbon emissions and effective carbon prices. The results show that a $1 discrepancy in carbon prices between the destination and origin countries is associated with a 0.13 %-0.27 % rise in emissions embodied in exports from the origin to the destination. We further identify evidence of carbon leakage in the service sector, a dimension often overlooked in prior studies. Moreover, the magnitude of leakage appears to increase with widening carbon price disparities over time. The findings of this study show that nations need to initiate negotiations to improve global cooperation in order to avoid carbon leakage and combat global climate change effectively.