Carbon leakage occurs when the introduction of environmental policies such as carbon pricing in a country or a coalition of countries leads emissions to increase in third countries with laxer environmental policies. This well-known phenomenon may occur due to competitiveness effects given by the fact that countries that do not impose carbon pricing face lower production costs and due to responses in global energy markets.

Multi sectoral, multi country computable general equilibrium models have been widely adopted for the quantification of leakage rate following a wide range of policies. These models can be used to conduct ex ante assessment of policy impacts in a controlled environment where policy scenarios can be compared with a business-as-usual no policy intervention. In this project we build on the existing literature and extend a conventional computable general equilibrium model with new trade theory inspired by the work of Melitz. Models based on simple imperfect substitution (Armington) assumptions do not consider firms heterogeneity and productivity effects (positive or negative) linked to changes in trade policies thus they may be missing important channels for leakage.

The newly built model has the potential for addressing important questions starting from a quantification of leakage that accounts for trade effects in a more realistic setting. The model can be used to assess the impact of policies aimed at combating carbon leakage such as border carbon adjustment. In addition, the project will look into distributional effects of both environmental policies and of policies aimed at reducing leakage.

The candidate will also part of the Centre for Inclusive Trade Policy network to which this project is affiliated. The successful candidate for this project will join a vibrant community of postgraduate researchers at the University of Strathclyde in Economics, home of the Fraser of Allander Institute.

Further information

The project is part of the Centre for Inclusive Trade Policy.