Carrying Carbon? Negative and Positive Carbon Leakage With International Transport

Abstract

This paper studies how carbon pricing affects greenhouse gas (GHG) emissions from international transport, production, and consumption of traded goods by modeling the international transport sector explicitly. Strategic behavior of a transport firm generates a novel mechanism of carbon leakage across borders and sectors. The effectiveness of carbon pricing depends on whether the backhaul problem (i.e., the imbalance of shipping volume in outgoing and incoming routes) is present. If the backhaul problem is absent, carbon pricing is effective in reducing global GHG emissions. With the backhaul problem, carbon pricing on goods production results in cross-border carbon leakage. However, strategic freight-rate setting by the transport firm mitigates this leakage. The opportunity for foreign direct investment (FDI) also affects carbon-pricing effectiveness because the transport firm tries to deter FDI. Surprisingly, carbon pricing in the transport sector may not affect GHG emissions at all. Moreover, domestic carbon pricing on goods production may decrease GHG emissions from both transport and foreign production even if there is no domestic production under FDI.