Ž .
Energy Economics 23 2001 121᎐139
Subglobal climate-change actions and carbon leakage: the implication of
international capital flows
Mustafa H. Babiker
U MIT Joint Program on the Science and Policy of Global Change, Cambridge, MA 02139-4307,
USA
Abstract
The climate-change agreement negotiated in Kyoto obliges the OECD countries to initiate the international effort of abating the anthropogenic greenhouse gas emissions. In
the event that such an initiative is taken, the associated competitive pressures may induce Ž
significant offsetting increases in non-OECD emissions a process generally known as .
leakage . The current models used to study these competitive effects have adopted an empirically inconsistent view of the world that international capital markets are perfectly
integrated. To the extent that restrictions on the international mobility of capital affect regional investment decisions, it might be expected that the competitive impacts drawn from
these models could significantly be altered. This paper addresses this issue. The paper suggests that these competitive effects are not really contingent on capital flows. With a
regionally disaggregated dynamic model of the world economy, we show a quite robust result that carbon leakage is virtually unaffected by the presence of restrictions on the mobility of
international capital. 䊚 2001 Elsevier Science B.V. All rights reserved.
JEL classifications: F21; Q40
Keywords: Kyoto; Leakage; Capital flows; Competitive effects
1. Introduction
If OECD countries are to engage unilaterally in an effort to abate anthropogenic Ž
. CO -emissions along the lines suggested by the Berlin Mandate 1995, 1996 and
2
U
Ž .
E-mail address: babikermit.edu M.H. Babiker .
0140-9883r01r - see front matter 䊚 2001 Elsevier Science B.V. All rights reserved. Ž
. PII: S 0 1 4 0 - 9 8 8 3 0 0 0 0 0 6 5 - 7
M.H. Babiker r Energy Economics 23 2001 121᎐139 122
Ž .
the Kyoto Agreement 1997 , it is possible that significant offsetting increases in global emissions may take place in non-OECD countries. The scope for such a
leakage effect as well as its manifestations on international trade flows, the location of energy-intensive production, and the competitiveness of OECD
economies have been a subject of considerable interest among climate-change policies analysts in the US and Europe. Nevertheless, almost all of the existing
Ž .
Computable General Equilibrium CGE models used in studying these competi- tive impacts have adopted an orthodox view of the world that international capital
markets are perfectly integrated.
1
Unfortunately, the accumulated empirical evidence over the last two decades seem to refute strongly such a view.
Ž .
Ž .
The findings in Feldstein and Horioka 1980 , and Gordon and Bovenberg 1996 that the regional investment-savings patterns are largely independent of the rate of
return differentials are suggestive indicators that there have been some restrictions on the international mobility of capital. The presence of such restrictions may be
Ž .
due to risk aversion and capital market segmentation Feldstein, 1994 , to deliber- Ž
. ate government policies Summers, 1988 , or due to imperfect information trans-
fers. To the extent that restrictions on the international mobility of capital affect regional investment decisions, it might be expected that the competitive impacts
drawn from these models could significantly be altered. This paper addresses this issue.
Specifically, we ask the question whether the impacts of a unilateral OECD abatement action on the non-OECD emissions trajectories are affected by the
extent of capital flows. To put it more precisely: Do restrictions on international capital mobility significantly affect the regional and the global leakage profiles?
We use a dynamic multi-regional disaggregated general equilibrium model of the world economy to address the linkage between capital flows and carbon leakage.
Given the complexity of the interactions among regional economies, energy mar- kets, international trade, capital accumulations, and capital flows, such a detailed
computable general equilibrium framework is clearly warranted. Within this frame- work we show an invariant result that carbon leakage is virtually unaffected by the
extent of capital flows.
For the current climate-change-policies regime, such a result has two crucial implications. First, the policy recommendations to be drawn from the existing
Impact Assessment models are largely independent of the capital-flows assump- tion. Second, in the event of a subglobal abatement action, policies that aim at
curtailing leakage through restricting the international mobility of capital are virtually ineffective. Given the economic and political leverage of OECD it is
feasible that some forms of restrictions on capital flows, via the international lending institutions, may be effected with the objective to curtail carbon leakage.
Our result suggests that exercising such a power does not yield any significant
1
Ž .
Ž .
Examples of such impact assessment models are GREEN OECD , CRTM Rutherford , G-cubed Ž
. Ž
. Ž
McKibbin and Wilcoxen , IIAM Montgomery, Rutherford, and Bernstein , and WorldScan CPB .
Netherlands Bureau of Economic Policy Analysis . For a description and comparisons among the Ž
. different Impact Assessment models see Gaskins and Weyant 1993 .
M.H. Babiker r Energy Economics 23 2001 121᎐139 123
reduction in leakage. The rest of the paper is organized as follows. Section 2 outlines the key features of our dynamic general equilibrium model. Section 3
