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Summary 2: The Risk of Emissions Leakage
Abstract
In a world where not every country has the same climate change policy, there is a risk of emissions leakage occurring. When New Zealand implements an ETS, the resulting increase in production costs could mean that some exported products are no longer competitive, or products imported from other countries with less stringent climate policies are substituted for domestic products. This could cause some production activities to head off-shore, leading to job losses and no ‘real’ decrease in GHG emissions.
These problems could be reduced if they are effectively addressed in the design of the ETS. There are two potential solutions: we could allocate emissions units (New Zealand Units) each year to GHG-intensive firms or we could introduce a ‘border tax adjustment’.
Citation
Motu Research. 2007. "The Risk of Emissions Leakage," Summary 2 from the series Introduction to Emissions Trading, produced as part of the Climate Change Policy Dialogue.
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