After COP 21, with the adoption of the Paris Agreement in December 2015, the outlook for carbon pricing policies has been widened. While the agreement does not directly establish a global carbon pricing, the provisions accounted for in Article 6 have the potential to increase international cooperation in favour of greenhouse gas (GHG) mitigation through market mechanisms. The Brazilian Nationally Determined Contribution (NDC) considers the use of such mechanisms, though the configuration of the Brazilian climate policy does not specify the economic instruments for carbon pricing.
When examining the recent evolution of GHG emissions in Brazil, the already achieved historic reduction in deforestation – although in recent years it has grown again – sheds light on the need to address GHG mitigation in other sectors, such as industry. Especially energy-intensive industries play an important role in low-carbon development, being particularly exposed to climate policies. Concerns about possible industries starting to operate in other regions with less restrictive climate policies (carbon leakage) represent a major challenge for designing effective carbon pricing instruments (CPI).
Different methodologies for assessing carbon leakage exposure are currently used by different jurisdictions, each of them based on different approaches and indicators. In a study published in Climate Policy, we analyse the extent to which the use of different methodologies leads to different results in terms of exposure to the risk of carbon leakage, using the Brazilian industry sector as a case study. For doing so, three different methodologies were analysed: European Union Emissions Trading System (EU ETS), California Cap-and-Trade (California C&T), and Australian Carbon Pricing Mechanism (Australian CPM). These methodologies were applied to subsectors of the Brazilian industry aiming to verify if the use of different methodologies leads to different results in terms of sector exposure to the risk of carbon leakage. The next figure summarizes some results.
Main results indicate that carbon leakage exposure is an expected outcome of an eventual CPI implementation in Brazilian industry. However, results vary according to the chosen methodology, so the definition of the criteria is paramount for assessing sectoral exposure to the risk of carbon leakage.
Especially considering the current Brazilian climate policy, we can reinforce some conclusions of the paper and also update some of them. As stated, assessments of the risk of carbon leakage are directly related to the indicators and criteria used by each methodology. Thus, a given subsector may present different levels of exposure to carbon leakage depending on the methodological choice.
Nevertheless, despite the existence of discussions on the implementation of a carbon pricing policy in Brazil, with a strong participation of several stakeholders in the context of the Partnership for Market Readiness (PMR) Brazil, this agenda has been lost sight of by the current Brazilian government, so the evaluation of carbon leakage risks is being even more neglected. Also, more than a purely technical discussion, the methodological definition of carbon leakage risk is a political discussion: it can be well-conducted, leading to the success of a CPI, or even sabotaged, by implicitly subsidizing energy-intensive industries.
Luan Santos is professor of the Federal University of Rio de Janeiro (UFRJ) and his main research topics are climate policies, carbon pricing instruments, carbon leakage assessments, and competitiveness/distributive analysis