Carbon leakage in the Nordic countries

What are the risks and how to design effective preventive policies


Carbon leakage is a situation in which a policy-induced reduction in CO2 emissions domestically is followed by increased emissions abroad. We investigate from a Nordic perspective what industries are at risk of carbon leakage.We find that aluminum and copper, basic iron and steel and paper, all having energy intensities over 40 per cent, have the highest risk of carbon leakage.The policy of giving free emissions allowances to industries at risk of carbon leakage is relatively equally spread out, leaving industries at high risk “undercompensated” and industries at low risk “overcompensated”. We find that the leakage rates for the energy intensive industry from unilateral ambitious EU targets could be as high as 70%, and even as high as 85% if the Nordic countries unilaterally adopt more ambitious targets. The key to limit the risk of carbon leakage is collective global action.