Unilateral climate policy design should account for the effectiveness of different anti-leakage policies

Abstract

Abstract Identifying the effectiveness of anti-leakage policies across competitiveness, demand, and energy channels is crucial for unilateral climate policy design. Here we combine a global equilibrium model and channel decomposition approach to unravel the effectiveness of anti-leakage policies—free allocation system, carbon border adjustment mechanism (CBAM), and climate clubs—within the European Union Emissions Trading System. Free allocation (excluding power sector) and indirect emission cost aids modestly reduce carbon leakage across all channels. CBAM achieves negative leakage in competitiveness and demand channels, but increases leakage in the energy channel. Voluntary climate clubs without penalties, mainly mitigate leakage among member countries, but are less effective for non-members in the demand channel. The Buchanan club with imposing penalties on non-members, achieves the negative leakage, suggesting its potential to fully resolve leakage. However, these policies are less effective in the energy channel, potentially undermining efforts in other channels.