A chapter by Justin Caron appears in Handbook on Trade Policy and Climate Change edited by Michael Jacob, Edward Elgar Publishing Ltd (2022). 

Abstract: The potential for policy-driven emissions reductions to “leak” to less regulated regions is a well-researched topic in climate change economics, though no clear conclusion regarding the likely magnitude of the problem has yet to emerge from the literature.

This chapter offers a broad overview of carbon leakage estimates, combining insights from various methodologies that existing meta-studies have so far reviewed separately: “simulation” studies providing ex-ante projections from complex economic models, and “estimation” studies that econometrically tease out ex-post evidence for leakage from existing carbon pricing schemes.

Combined with additional indirect evidence that trade frictions are generally strong relative to climate policy-induced energy price differentials, I conclude that the weight of evidence points to the conclusion of “some, but not too much” leakage: while specific sectors may be severely affected, estimated economy-wide leakage rates (of 10-30% on average) do not justify using it as an argument against climate policy.