GHG emission, trade balance, and carbon leakage: insights from modeling thirty-one European decarbonization pathways towards 2050

Recognizing the urgent need for concrete sectoral information in formulating European decarbonization pathways of policy relevance, this study exploits the rich sectoral details from a large bottom-up-built system dynamics model to formulate 31 European decarbonization pathways and creates a tailored-made computable general equilibrium model to evaluate their external effects. Our modeling results suggest that increasing decarbonization ambitions leads to higher reductions of greenhouse gas emissions in Europe (EU27 plus the UK and Switzerland), but with the undesirable outcome of decreasing its external competitiveness through worsened trade balance, if the rest of world does not reciprocate Europe’s decarbonization ambition. A comparison of results across pathways with varying ambition levels between demand and supply measures further reveal their differential roles: when keeping demand-side ambitions constant, elevating efforts on the supply side leads to larger emission reductions and bigger decrease in trade balance; however, holding supply-side ambitions unchanged and increasing demand-side efforts improves trade balance while achieving larger emission reductions. Furthermore, ambitious demand measures avoid more losses of net exports when coupled with more ambitious supply mitigation measures. These results point to the need for coordinated demand and supply mitigation actions across sectors, and to the benefits of climate-friendly lifestyle choices in not only reducing emissions but also in avoiding undesirable trade outcomes. Our results also demonstrate positive associations between increasing reductions in GHG emission, worsening external trade balance, and rising carbon leakage rate for the EU. To safeguard the global effectiveness of European decarbonization actions, global cooperation under the Paris Agreement is needed so as to avoid the application of unilateral trade policy such as border carbon adjustments.