Carrying Carbon? Negative and Positive Carbon Leakage with International Transport

This study examines the effects of carbon pricing of greenhouse gas (GHG) emissions from international transport, production, and consumption of traded goods by modeling the international transport sector explicitly. Endogenous international transport explains the novel mechanism of carbon leakage across borders and sectors. The effectiveness of carbon pricing depends on whether the backhaul problem (i.e., the imbalance of shipping volume in outgoing and incoming routes) is present. If the backhaul problem is absent, any carbon pricing is effective because the global GHG emissions are necessarily reduced. With the backhaul problem, carbon pricing in goods consumption remains effective, whereas carbon pricing in goods production results in cross-border carbon leakage. However, endogenous transport costs mitigate this leakage. The opportunity of foreign direct investment also affects carbon pricing effectiveness. In particular, carbon pricing in the transport sector may not affect GHG emissions at all.