Unpacking the economic drivers and dynamics of climate mitigation policy spillovers

This paper examines how differences in climate mitigation policies across countries lead to international spillovers, with a particular focus on the effects of spillovers as they are transmitted through international markets on carbon leakage and economic outcomes. It examines the effects of introducing a carbon tax in a selected set of countries; the analysis explores 16 384 possible coalitions of regions, ranging from unilateral to global implementation. The analysis also assesses sectoral spillovers and how policy design choices shape spillovers. The findings show that international co-operation on mitigation significantly reduces economy-wide leakage even if a minority of global emissions are covered. Nonetheless, emission-intensive and trade-exposed (EITE) sectors and transport services sectors remain the primary conduits for leakage regardless of coalition size. Fossil fuel price dynamics emerge as the dominant transmission channel, with extraction-related emission reductions effectively neutralising leakage under very large coalitions. Impacts on economic outcomes grow with coalition size, with fossil fuel exporters facing the largest losses. Policy design choices, including tax stringency, implementation speed, and income-based differentiation, further shape these spillovers in important but predictable ways.