The Kyoto Protocol: Regional and sectoral contributions to the carbon leakage

Carbon dioxide emissions abatement in a group of countries can result in in creased emissions in non-abating countries. This effect has been referred t o as carbon leakage. The Kyoto Protocol calls for a number of industrialize d countries to limit their emissions while other countries have no abatemen t commitments. This paper assesses the sectoral and regional determinants o f the leakage in a static multi-sector, multi-regional computable general e quilibrium model. In baseline estimates based on our model, the Kyoto Proto col leads to a carbon leakage rate of 10 percent. A decomposition technique is applied which attributes increases in CO2 emissions by non-participatin g countries to specific sectors in the abating countries. This information is important for the debate on the tax exemptions for certain industries in the participating countries as it provides information for the most- and l east-leakage contributing sectors of the economy. Additional calculations i ndicate the need for caution in the carbon tax design. Exemptions of any se ctor from a carbon tax are not justified because they lower welfare in a re gion. The degree of sectoral and regional data disaggregation, and internat ional capital mobility do not change the leakage rate significantly. Fossil -fuel supply elasticities and trade substitution elasticities are crucial d eterminants for projecting the total world emissions of CO2.