Carbon leakage from a Nordic perspective

Carbon pricing is generally considered a highly effective tool in reducing carbon emissions. Putting a price on carbon provides incentives for users and producers of fossil fuels to reduce consumption and develop low carbon products and processes. However, pursuing an ambitious climate policy can lead to carbon leakage, which refers to a situation where unilateral or regional climate change policy drives the relocation of industry investments and installations, and associated emissions, to third countries.

This report by Copenhagen Economics has been commissioned by the Nordic Council of Ministers to give an overview of the industries at risk of carbon leakage in the Nordic countries, and estimate the expected extent of carbon leakage from unilateral climate policies in the Nordic countries. The report also assesses available policy options that may reduce the risk of carbon leakage, such as exemptions from energy tax and exemptions from quota obligations under green certificate schemes. The key drivers of carbon leakage are identified, which include energy intensity, product differentiation, transportation costs and capital intensity. The analysis suggests that industries such as paper and pulp, iron and steel, aluminium, cement, pharmaceuticals, chemicals, and fertilizers are most at risk of carbon leakage in the Nordic manufacturing sector.