IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change

Spill-over effects from mitigation in Annex I countries on Non-Annex I countries

Spill-over effects of mitigation from a cross-sectoral perspective are the effects of mitigation policies and measures in one country or group of countries on sectors in other countries. One aspect of spill-over is so-called ‘carbon leakage’: the increase in CO2 emissions outside the countries taking domestic measures divided by the emission reductions within these countries. The simple indicator of carbon leakage does not cover the complexity and range of effects, which include changes in the pattern and magnitude of global emissions. Modelling studies provide wide-ranging outcomes on carbon leakages depending on their assumptions regarding returns to scale, behaviour in the energy-intensive industry, trade elasticities and other factors. As in the TAR, the estimates of carbon leakage from implementation of the Kyoto Protocol are generally in the range of 5–20% by 2010. Empirical studies on the energy-intensive industries with exemptions under the EU Emission Trading Scheme (ETS) highlight that transport costs, local market conditions, product variety and incomplete information favour local production, and conclude that carbon leakage is unlikely to be substantial (medium agreement, medium evidence) [11.7].

Effects of existing mitigation actions on competitiveness have been studied. The empirical evidence seems to indicate that losses of competitiveness in countries implementing Kyoto are not significant, confirming a finding in the TAR. The potential beneficial effect of technology transfer to developing countries arising from technological development brought about by Annex I action may be substantial for energy-intensive industries, but has not so far been quantified in a reliable manner (medium agreement, low evidence) [11.7].

Perhaps one of the most important ways in which spill-overs from mitigation actions in one region affect others is through the effect on world fossil fuel prices. When a region reduces its fossil fuel demand because of mitigation policy, it will reduce the world demand for that commodity and so put downward pressure on the prices. Depending on the response of the fossil fuel producers, oil, gas or coal prices may fall, leading to loss of revenues by the producers, and lower costs of imports for the consumers. As in the TAR, nearly all modelling studies that have been reviewed show more pronounced adverse effects on oil-producing countries than on most Annex I countries that are taking the abatement measures. Oil-price protection strategies may limit income losses in the oil-producing countries (high agreement, limited evidence) [11.7].