Discussion Paper

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Carbon leakage through supply chain adjustments

Bonn: German Institute of Development and Sustainability (IDOS)

ISBN: 978-3-96021-255-3
DOI: https://doi.org/10.23661/idp10.2025
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This paper examines carbon leakage through supply chain recalibration in response to European carbon policies. Using input-output data and a high-frequency identification approach for carbon policy shocks, this paper investigates whether stringent carbon regulations in Europe affect the imports of carbon-intensive inputs from major emerging economies lacking similar policies. The findings reveal a temporary increase in the rate of change of imports from emerging countries relative to all inputs in the carbon-intensive sectors following carbon policy shocks, with effects peaking after two years before dissipating. While not directly quantifying emissions transfer, this study suggests some evidence of short-term input substitution patterns consistent with carbon leakage through international supply chains.

Hanyi Wang is an economist who studies the cost-effectiveness and distributional impacts of climate policies on firms and their trade implications. She also studies sustainable investing’s impact on firms and how regulatory pressures facilitate green transitions. Dr Wang received her PhD in Economics from the University of California San Diego in June 2024.