When national climate policy leads to a migration of CO2 emissions: TUD research team investigates the phenomenon of carbon leakage

Are global emissions rising due to uncoordinated climate policy? In a recent study, a research team led by Simon J. Bolz, Research Associate at the Chair of Economic Policy and Economic Research at TUD Dresden University of Technology, shows how national climate policy can be tied to unintended global effects: Emissions are falling domestically but rising abroad – a process known as “carbon leakage”. The study was published in the renowned Journal of International Economics and underscores the need for greater international coordination of climate and trade policies.

In their study, the authors examined how tax increases on CO₂ emissions in one country affect global total emissions, income, and inequality. The basis for this is a general equilibrium model with companies that can relocate their production abroad (offshoring). Simon J. Bolz explains what this means, “If a government increases its CO₂ tax with the aim of reducing emissions, most domestic companies respond by reducing their environmentally harmful production. However, the most productive—and therefore actually the cleanest—companies relocate the more polluting parts of their production abroad to countries with lower CO₂ prices. This leads to wage increases abroad. However, if CO₂ taxes remain unchanged in these countries, it makes reducing emissions more expensive in relation to polluting – outsourced production becomes dirtier.”

This phenomenon, whereby emissions fall domestically but rise abroad, is known as carbon leakage. If the tax differences are small, global emissions will continue to decline overall. However, if the differences become significant, leakage can exceed 100 percent  – the policy effect is reversed and global emissions increase. It is difficult to devise measures to prevent this effect, Bolz explains, “A CO₂ border adjustment, such as the EU CBAM Carbon Border Adjustment Mechanism (CBAM) in the European Union, could prevent carbon leakage in addition to the CO₂ tax in our model, but global inequality and income losses would increase. We are therefore not advocating for less national determination, but rather for more global cooperation – because this is the only way to avoid unintended feedback loops and shape effective climate policy.”

Publication:

Bolz, S.J.; Naumann, F.; Richter, P.M. (2025): Unilateral environmental policy and offshoring, in: Journal of International Economics. https://doi.org/10.1016/j.jinteco.2025.104185

Contact:

Simon J. Bolz
Research Associate
Chair of Economics, esp Economic Policy and Economic Research
Tel.: +49 351 463 34490
Email: