Carbon prices, emissions and international trade in sectors at risk of carbon leakage

What is the effect of recent carbon price developments on domestic emissions and carbon leakage? This paper first develops a comprehensive plant-level carbon pricing dataset for key heavy industries at risk of carbon leakage, i.e. aluminium, cement and steel plants in 140 countries, drawing on satellite observations. The new dataset reveals that the average plant-level carbon price for these sectors increased by a factor of seven from USD 1.4 per tonne of CO2-equivalent (tCO2e) in January 2015 to USD 11/tCO2e in December 2021. Over the same time period, carbon price asymmetries i.e. the average difference in carbon prices among trading partners, increased by more than 350%. The paper then tests whether higher carbon prices have reduced plant-level emissions and whether rising carbon price asymmetries have affected international trade and led to carbon leakage. Results suggest that, on average, a USD 1/tCO2e increase in carbon prices reduces cement and steel plants’ emissions by 1.3%. Back-of-the-envelope calculations suggest that carbon leakage through international trade offset around 13% of these domestic emission reductions.