Project Outline: Tackling Leakage

Under the current EU ETS the competitiveness and leakage effects of a unilateral climate policy for industry with trade exposure have been under discussion. While leakage is of major concern to climate policy makers, industry and industrial policy makers pronounce competitive disadvantages from carbon pricing. Leakage effects are becoming increasingly relevant for the EU ETS after 2013 and the next unilateral climate policy steps in a number of other countries (Australia, New Zealand, Canadian and US provinces). Different carbon pricing gives room for leakages, either by a shift of consumption of carbon-intensive goods towards cheaper import substitutes, entailing more CO2-intensive production in regions without carbon pricing, or by a (re)location of industrial production to these areas.
In a world of unequal carbon prices more certainty for effective emission reduction is needed, especially when it comes to investment in sectors with carbon-intensive production. A commitment to a longer term ETS and other national measures thus needs to consider remedies against leakage as long as the international climate policy does not lead to a level playing field. At the same time, any measure taken by large countries will have an impact on other countries, be it in terms of climate policy approaches or due to the impact on trade in goods.
The Climate Strategies Project on Tackling Leakage in A World of Unequal Carbon Prices addresses four major issues.

1. Illustrating leakage and competitiveness effects from unilateral climate policies;
   
2. Free allocation to address leakage and competitiveness;
   
3. Border adjustment policy;
4. Implications for international climate policy.