Spillovers of climate policy; an assessment of the incidence of carbon leakage and induced technological change due to CO2 abatement measures

Besides primary effects such as reducing greenhouse gas emissions, the implementation of climate policies in Annex I countries of the Kyoto protocol may have secondary (side) effects, as the resulting increase in carbon or fossil fuel costs may affect energy prices and, hence, the profitability of energy-using industries in Annex I versus non-Annex I countries. From a global warming point of view, these secondary effects or 'spillovers' of climate policy may be either negative or positive. Negative spillovers refer particularly to the incidence of carbon leakage, i.e. an increase in CO2 emissions in non-abating countries due to the implementation of climate policy in Annex I countries. Positive spillovers, on the other hand, refer especially to the inducement of carbon-saving technological innovations and the diffusion of these innovations, both at home and abroad.The primary objective of the present report is to provide a summary assessment of the analytical and empirical knowledge on the potential incidence of spillovers due to climate policy in Annex I countries of the Kyoto protocol. These spillovers include especially the prevalence of carbon leakage as well as the induced innovation and diffusion of carbon-saving technologies in both Annex I and non-Annex I countries. In addition, the report aims to draw lessons, conclusions and policy implications with regard to the opportunities and means to reduce potential negative spillovers of climate policy (i.e. 'carbon leakage') and to enhance its potential positive spillovers ('induced technological change').The present report provides first of all a conceptual framework, particularly on the terms 'spillovers', 'carbon leakage' and 'induced technological change'. Subsequently, it presents the major findings of analytical model studies on the incidence of carbon leakage due to climate policy in Annex I countries of the Kyoto protocol, followed by similar analytical findings on the incidence of induced technological spillovers. Next, it presents the major findings of the three empirical case studies on climate policy spillovers, particularly in the energy-intensive manufacturing industry, the wind power industry, and the biomass and bio-energy industry. Finally, it discusses the major policy implications of the project 'Spillovers of climate policy'.