Subglobal climate-change actions and carbon leakage: the implication of international capital flows

The climate-change agreement negotiated in Kyoto obliges the OECD countries to initiate the international effort of abating the anthropogenic greenhouse gas emissions. In the event that such an initiative is taken, the associated competitive pressures may induce significant offsetting increases in non-OECD emissions (a process generally known as leakage). The current models used to study these competitive effects have adopted an empirically inconsistent view of the world that international capital markets are perfectly integrated. To the extent that restrictions on the international mobility of capital affect regional investment decisions, it might be expected that the competitive impacts drawn from these models could significantly be altered. This paper addresses this issue. The paper suggests that these competitive effects are not really contingent on capital flows. With a regionally disaggregated dynamic model of the world economy, we show a quite robust result that carbon leakage is virtually unaffected by the presence of restrictions on the mobility of international capital. (C) 2001 Elsevier Science B.V. All rights reserved.