Intermediate input linkage and carbon leakage

What is it about?

Climate regulations tend to target energy-intensive sectors whose products are widely used in industrial production as intermediate inputs, and carbon abatement may be partially offset by intermediate input-led leakage. This paper aims to examine the impact of intermediate input linkages on carbon leakage both theoretically and empirically. It identifies four leakage effects and derives closed-form solutions for these leakage effects. Our emperical analysis further suggests that such leakage is mainly through the production substitution effect and the multiplier effect.

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Why is it important?

This study contributes to the literature in several ways. First, this study clarifies the direct and indirect impacts of intermediate input linkage on carbon leakage of sectoral climate regulations from the perspectives of four different leakage effects. Second, the study develops a Harberger-type model with an input-output linkage structure, which can represent two countries linked through the trade of intermediate goods or a closed economy with two interdependent sectors. Third, the study proposes a method to link the theoretical and numerical models by adopting Structural Decomposition Analysis and quantitatively evaluates the magnitude of different leakage effects. The policy implication is that policy makers should consider domestic sectoral linkages in the determination of climate regulations and anti-leakage measures.

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