The Global Impact of Carbon Taxation on Carbon Leakage

Abstract

Climate change presents a significant global challenge, prompting governments to adopt a range of mitigation strategies, most notably, carbon pricing schemes. However, such policies are often met with concern over carbon leakage, where emissions reductions in one country are offset by increases elsewhere, potentially undermining the environmental effectiveness of national efforts. This thesis investigates the relationship between carbon pricing policies and national carbon leakage rates over the period 1995–2018. Drawing on data from the TECO2 dataset and the International and Sectoral Variation in Industrial Energy Prices 1995–2015, and applying the electricity price elasticity methodology introduced by Misch and Wingender (2024), this study calculates annual carbon leakage rates for each country. In doing so, it extends previous research, such as the Misch and Wingender and Sato et al (2019). A key contribution of this thesis is its novel application of the Carbon Pricing Dashboard, a dataset that remains underutilized in empirical research. This study aims to demonstrate its potential for carbon leakage analysis. Another important contribution is the attempt to extend the methodology developed by Misch and Wingender by applying it not only to CO₂ emissions, as in the original study, but also to broader greenhouse gas emissions. This provides insight into the scope and limitations of their approach when adapted to different types of emissions data. Finally, this thesis contributes to the ongoing policy discussion on carbon pricing by linking yearly carbon leakage rates to country specific pricing policy variables, such as carbon price levels and policy coverage. In doing so, it investigates whether systematic relationships exist between national carbon pricing strategies and the extent of carbon leakage. The results indicate that carbon pricing policies explain a meaningful share of the variation in leakage rates across countries, though country-specific fixed effects account for an even larger portion, suggesting that structural or institutional factors may play a more dominant role. Notably, the analysis reveals a negative relationship between carbon pricing and leakage rates, implying that more ambitious pricing policies may actually help reduce leakage. This finding challenges the prevailing narrative in the literature, which often assumes that stricter carbon pricing increases leakage and harms competitiveness. It suggests that policymakers might be able to adopt stronger carbon pricing measures without significant economic drawbacks. Additionally, the study finds no strong evidence that coordinated international carbon pricing efforts lead to greater leakage reductions compared to unilateral national policies, raising questions about the added value of formal international alignment in this context. However, these results should be interpreted with caution. The method used to estimate leakage rates may introduce bias, and further validation is necessary. That said, the research has some limitations. Most notably, the fixed effects model could not incorporate time fixed effects due to data constraints, raising the risk that some time-related variation may have been wrongly attributed to policy variables. This limitation may partly explain the unexpected direction of some results. By extending and refining the methodology developed by Misch and Wingender (2024), this thesis offers new empirical insights into the drivers of carbon leakage and contributes to the policy debate on the design and efficacy of national carbon pricing frameworks. In doing so, it also provides a more detailed methodological reflection on the assumptions and limitations inherent in price elasticity based leakage estimation.