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There’s a fatal flaw in the piecemeal approach to decarbonization

Emissions cuts in one country or region are likely to lead to increases elsewhere
May 26, 2020

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Various countries and regions around the world are making bold plans and announcements about decarbonization. The European Union (EU), for example, wants its economy to be climate-neutral by 2050.

But there’s a fatal flaw in this piecemeal approach to decarbonization, a new analysis suggests. In a globalized economy, if individual countries or regions decarbonize while others maintain the status quo, a large portion of the carbon saved in one part of the world will wind up being emitted elsewhere.

Effective climate policy will have to find ways of managing this carbon ‘leakage,’ University of Copenhagen economists Wusheng Yu and Francesco Clora write in a briefing paper produced as part of the EUCalc project, a collaborative effort involving 12 institutions across 9 countries to sketch out how the EU could undertake the transition to a green economy.

The analysis rests on a computer model that simulates various EU economic sectors and trade linkages with the rest of the world, based on data from EU member states, the United Kingdom, and Switzerland. A web-based tool enables policymakers to use the model to explore different ways of reaching net-zero emissions both for the EU as a whole and for individual member states.

In the paper, the researchers detail the economic and other knock-on effects of two different emissions scenarios for the EU: a least-ambitious scenario, in which the region actually dials back its current decarbonization efforts, and a most-ambitious scenario, in which policymakers lean on all possible levers to promote decarbonization.

If the EU undertakes ambitious decarbonization and the rest of the world doesn’t, this will result in a big EU trade deficit, the model shows. A big trade deficit isn’t necessarily a bad thing, but a sudden increase can cause lots of economic disruption, especially in parts of the economy that have become less competitive on a global scale. So that’s something that policymakers will have to be alert for and manage, the researchers say.

Moreover, “changing external trade patterns and trade flows caused by the actions to reduce the EU’s internal emissions means that the direct emissions reductions may be partially offset by increased emissions elsewhere,” the researchers write.

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The most ambitious decarbonization pathway in the EU is likely to yield a carbon leakage rate of 61.5%, the model predicts. That is, for every kilogram of carbon dioxide or equivalent emissions avoided or sequestered within the EU, about six-tenths of a kilogram will be emitted elsewhere in the world. The net decarbonization achieved is therefore less than half of what it first seems.

The analysis shows how this would play out in various parts of the economy. For example, if carbon-intensive industries such as concrete, steel, and chemicals become greener in Europe, this will increase the cost of EU products relative to those produced by China and the United States (again, assuming the climate status-quo prevails in those countries). The result will be fewer such goods produced in Europe, and more imports of less-green products made elsewhere.

Similarly, reduced demand for fossil fuels in Europe means falling prices, facilitating increased fossil fuel consumption elsewhere in the world. Climate-friendly consumer choices by Europeans such as less red meat consumption could also reverberate through the global food system to increase emissions elsewhere in the world.

The upshot is that decarbonization depends on coordinated action of countries around the world. “A green transition in the EU alone cannot significantly reduce global CO2 emissions,” Yu said in a statement. “We need to find ways to get others on board. Otherwise, the impact of our efforts will be largely offset by increased emission elsewhere, making it impossible to meet the Paris Agreement targets in time.”

Source: Yu W. and F. Clora. “Implications of decarbonizing the EU economy on trade flows and carbon leakages.” EUCalc Policy Brief #7, 2020. 

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