The effects of the Kyoto Protocol on the carbon trade balance

Abstract

This study presents estimates of the magnitude of carbon leakage as a consequence of emission reduction commitments under the Kyoto Protocol using gravity model-style regression analysis on data from the WIOD project. The carbon trade balance between 2002 and 2009 was reduced by 705 megatons of carbon dioxide due to Kyoto and carbon leakage amounts to slightly above 4% of traded carbon dioxide emissions. We highlight four previously neglected issues: First, we control for multilateral trade resistance in the estimation of a unilateral policy by using a two-stage procedure. Second, we control explicitly for the effect of Eastern European countries on leakage estimates. We show that this country group strongly affects the baseline estimates in the framework introduced by Aichele and Felbermayr (Rev Econ Stat 97(1):104–115, 2015). Third, we introduce an alternative specification of the Kyoto variable. Fourth, this is the first study to present econometric evidence for the magnitude of carbon leakage from services sectors. While service elasticities are estimated to be sizable, strong leakage is limited to transport sectors as well as renting of machinery. The manufacturing sectors of metals, machinery and transport equipment are responsible for three quarters of observed leakage.