The effects of environmental policies on embodied emissions

Abstract

In the absence of a global greenhouse gas reduction mechanism, the EU adopted the strongest climate mitigation policy in the world. As a result of this, there are concerns about the challenges faced by EU carbon-intensive and trade exposed countries and industries as well as regarding the effective contribution of EU climate policies to GHG emission reductions. One the one hand, competitiveness may be harmed due to the unilateral nature of climate mitigation policy and the impact this can have on trade flows and balances. On the other hand, European demand for foreign carbon-intensive good may increase, potentially offsetting any emission reduction efforts. In this analysis, we assess whether and how embodied emissions in traded goods have changed over time, particularly in response to the implementation of climate mitigation policies. We find evidence that stringent environmental policies are associated with lower emissions intensity and lower exported emissions. But we do not find conclusive evidence for the pollution haven hypothesis: our results do not support the existence of carbon leakage from the EU in aggregated terms. Further analysis on more disaggregated sector level emission data is under way within INNOPATHS and will represent an important refinement of our findings.