The Kyoto regime, changing patterns of international trade and carbon leakage

A group of industrialized countries and countries with economies in transition have agreed to reduce their emissions of greenhouse gases under the Kyoto Protocol. Energy- en carbon-intensive industries in these countries fear that policies to implements these reduction targets will harm their competitiveness, endanger employment and will not improve the global environment, because of carbon leakage. Various studies have analyzed competitiveness and carbon leakage. Of the many factors that potentially affect competitiveness and carbon leakage, changes in import tariffs have received little attention in the literature. Yet we know that, at least until 2005, tariffs and other trade barriers will be subject to the gradual implementation of the Uruguay Round agreements on trade liberalization. This paper presents quantitative estimates of the impacts of the implementation of the Kyoto agreements on carbon leakage with and without the full implementation of the Uruguay Round import tariff reductions. We find that the implementation of the Uruguay Round increases the rate of carbon leakage. This is caused by impacts on the world energy markets, reducing the price of energy commodities for developing countries. There is no evidence, however, that the tariff reductions increase industrial relocation. To the contrary, the Uruguay Round tariff reductions strengthen the competitive advantage of Northern CO2-intensive industries in comparison to a CO2 reduction scenario without trade liberalization.