Greenhouse-Gas Emission Controls and International Carbon Leakage through Trade Liberalization

ABSTRACT. This paper studies greenhouse-gas (GHG) emission controls in the presence of carbon leakage through international firm relocation. The Kyoto Protocol requires developed countries to reduce GHG emissions by a certain amount. Comparing emission quotas with emission taxes, we show that taxes coupled with lower trade costs facilitate more firm relocations?than quotas do, causing more international carbon leakage. Thus, if a country is concerned about global emissions, emission quotas would be adopted?to mitigate the carbon leakage. Firm relocation entails a trade-off between trade liberalization and emission regulations. Emission regulations may be hampered by trade liberalization, and vice versa.