Assessment of carbon leakage by channels: An approach combining CGE model and decomposition analysis Xiujie Tan a , Yu Liu b,c, ⁎, Jingbo Cui d , Bin Su e a Institute for International Studies, CICTSMR, Wuhan University, Wuhan 430072, China b Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China c School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China d School of Economics and Management, Wuhan University, Wuhan 430072, China e Energy Studies Institute, National University of Singapore, Singapore abstract article info Article history: Received 15 March 2018 Received in revised form 20 June 2018 Accepted 2 July 2018 Available online 07 July 2018 JEL classification: C68 Q43 Q54 Q58 As carbon leakage occurs through the channels of competitiveness, demand and energy, a detailed study of leakage channels in a unified framework is clearly warranted. This paper illustrates these three channels by a sim- plified theoretical general equilibrium model. It confirms the common concern that the competitiveness and de- mand channels as a whole cause relocation of energy-intensive production, and the energy channel leads to increased carbon-intensity in other regions, resulting in positive leakage. We propose an approach, combining computable general equilibrium (CGE) model and decomposition analysis, to decompose overall carbon leakage into three channels. The numerical simulation using the multi-region CGE model in China to study the carbon leakage from Hubei Pilot ETS is presented. The results show that (a) the competitiveness channel is the main source of carbon leakage, while the demand channel is smallest one; (b) carbon leakage rate through the energy channel is modest due to limited energy price fall. Policy implications of this study are also discussed. © 2018 Elsevier B.V. All rights reserved. Keywords: Carbon leakage channel Decomposition analysis CGE model Hubei pilot ETS China 1. Introduction The Paris Agreement, reached at 2015 United Nations Climate Change Conference, put forward a global response plan against climate change post-2020. Although the Agreement may be a ‘plugging’ of car- bon leakage (Murphy and McDonnell, 2017), this problem remains one of the most critical environmental issues. According to the Agreement, all parties are required to submit the Nationally Determined Contribu- tions (NDCs). There will be substantial variations in the stringency of cli- mate policies across countries, due to differentiating historical responsibilities, varying capacities for reduction and various stages of development. As a result, carbon leakage will arise when these varia- tions bring about abatement cost differentials (in actual costs or shadow costs). Besides, some sub-national jurisdictions have imposed stringent climate policies with no global policy response. For example, China has launched seven regional Pilot Emissions Trading Schemes (ETS) since 2013. It implies that carbon leakage can happen at different scale levels (province, state, nation, or world region). Therefore, the Paris Agree- ment has inherited the carbon leakage issue formerly existed under the Kyoto Protocol, 1 calling for a need for further study. The Intergovernmental Panel on Climate Change (IPCC) classifies carbon leakage as a spillover effect from climate policies. The leakage process may occur through three different but related channels, includ- ing: (a) relocation of energy-intensive production in regions with lax climate policies (competitiveness channel); (b) increased consumption of fossil fuels in these regions through decline in energy price (energy channel); and (c) changes in income thus in demand (demand channel) (IPCC, 1996, 2001, 2007). Some studies investigated theoretical mecha- nisms of carbon leakage channels using analytical model. For example, Burniaux and Martins (2012) offered a general equilibrium exploration of the key channels: energy and non-energy markets, and captured factors underlying the sizes of carbon leakage. Baylis et al. (2014) built Energy Economics 74 (2018) 535–545 ⁎ Corresponding author at: Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China. E-mail address: liuyu@casipm.ac.cn (Y. Liu). 1 Under the Kyoto Protocol, carbon leakage is defined as: the increase in carbon emis- sions from non-Annex-I countries, divided by the emission reductions from Annex-I coun- tries. Under the Paris Agreement, it is appropriate to revise it into: the increase in carbon emissions from jurisdiction/sector with lax climate policies, divided by the emission re- ductions from jurisdiction/sector with stringent climate policies. https://doi.org/10.1016/j.eneco.2018.07.003 0140-9883/© 2018 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneeco