Conference Agenda

Carbon prices differ quite substantially, not only between countries but also within. In this paper we investigate whether this can be (partly) defended by reduced carbon leakage to other countries. We do this in two steps. First, our descriptive analysis for the years 2010, 2015 and 2021 suggests that there has been a positive correlation at the sector level in Europe between carbon price levels and our measure of leakage exposure. Second, using a multi-region and multi-sector computable general equilibrium (CGE) model, we examine whether a shift from historically heterogeneous carbon prices towards uniform carbon prices in the EU would have led to higher or lower leakage. We calibrate our model to a detailed dataset (GLORIA) for each of the years 2013-2021, and simulate the model with different carbon price scenarios, taking into account that most firms regulated by the EU Emissions Trading System have received a large number of (output-based) free allowances. Our results suggest that whereas a shift towards uniform carbon pricing would have increased leakage in the early years, leakage would have decreased in later years when carbon prices on average were much higher. Hence, in these later years, uniformization of carbon prices would not only have improved cost-effectiveness but also reduced leakage.