Do Climate Policies Shift Emissions Abroad? Evidence on Carbon Leakage Through Trade

Stricter climate policies do increase emissions embedded in imports, but mainly because countries import more, not because they import dirtier goods, and the carbon intensity of imports often falls as supply chains become cleaner. Overall carbon leakage is modest: the median leakage rate is about 3%, meaning unilateral climate action still delivers clear global emissions reductions, especially when carbon pricing is combined with technology support and regulations.

Produced by the OECD Economics Department, this study examines a key fear holding back ambitious climate action: the risk that stricter climate policies at home simply push emissions abroad instead of reducing them globally. This phenomenon, known as carbon leakage, can occur when higher production costs caused by climate rules make domestic firms less competitive, encouraging imports or relocation of production to countries with weaker policies. Using data from 49 countries and 14 manufacturing sectors between 2000 and 2020, the paper asks a straightforward but crucial question: do tougher climate policies actually reduce global emissions, or do they just reshuffle where emissions occur?

How the study tracks emissions through trade

To answer this, the authors combine international trade data with detailed information on emissions embedded in goods, including emissions along global supply chains. They also use the OECD Climate Actions and Policies Measurement Framework to measure how strict climate policies are in each country. A key strength of the study is its method: it compares international trade flows with domestic trade flows within the same country. This makes it possible to isolate the specific effect of climate policy on imports, rather than confusing it with broader economic trends.

The analysis breaks imported emissions into three parts. First is the scale effect, meaning changes in how much a country imports. Second is the technique effect, which captures how clean or dirty those imports are. Third is the composition effect, which reflects whether countries shift toward cleaner or dirtier products and sectors.

What happens when climate policies become stricter

The results show that stricter climate policies do lead to higher emissions embedded in imports, but the reason is often misunderstood. On average, when climate policy stringency rises, imported emissions increase by about 10 percent relative to domestic emissions. This confirms that carbon leakage exists. However, this increase is driven mainly by higher import volumes, not because countries start importing dirtier goods.

In fact, the carbon intensity of imports usually falls as climate policies tighten. Countries tend to source cleaner products, use greener supply chains, and benefit from cleaner technologies abroad. These improvements offset part of the emissions increase caused by higher imports. As a result, carbon leakage is smaller than many critics of climate policy suggest.

Why some climate policies leak more than others

Not all climate policies have the same effects. Market-based policies such as carbon taxes and emissions trading systems are the biggest drivers of carbon leakage. By directly raising production costs, they encourage firms and consumers to rely more on imports, and in some cases slightly increase the carbon intensity of those imports.

In contrast, technology support policies, such as subsidies for clean research and low-carbon technologies, tend to lower the carbon intensity of imports. They help firms clean up supply chains and shift demand toward cleaner goods. Non-market regulations, such as efficiency standards, show similar benefits and generally do not increase import volumes much. The findings suggest that combining carbon pricing with technology and regulatory policies can reduce leakage risks while still cutting emissions.

How big carbon leakage really is

The study goes further than most by calculating actual carbon leakage rates, which measure how much of a domestic emissions cut is offset by higher emissions abroad. The headline result is reassuring. The median leakage rate is only about 3 percent. This means that for every 100 tonnes of emissions reduced at home, only about 3 tonnes reappear elsewhere through trade.

However, averages hide big differences. The average leakage rate is around 14 percent, driven by a small number of high-leakage cases. Small, open economies that rely heavily on imports, such as Iceland, Ireland, Costa Rica, and Switzerland, tend to face higher leakage risks than large economies like China or India. Emissions-intensive sectors such as metals, cement, and chemicals are also more vulnerable. Even so, these sectors often employ relatively few workers, which limits their economy-wide impacts.

Overall, the study concludes that carbon leakage is a real phenomenon, but it is manageable. Climate policies generally do not cause a rush toward dirtier imports, and well-designed policy mixes can reduce leakage while supporting global decarbonisation.