Leackage from Sub-national Climate Initiatives: The Case of California

Abstract

With federal policies to curb greenhouse gas emissions in the U.S. stagnating, California has taken action on its own. We estimate the impact of California’s cap-and-trade program on the leakage of emissions to other regions using a calibrated general equilibrium model. Sub-national policies can lead to high leakage rates as state economies are generally closely connected to other economies, including integration of electricity markets. Measures that will prevent leakage from California’s cap-and-trade program include requiring permits to be surrendered for emissions embodied in imported electricity and legislation banning “resource shuffling”. Under a cap-and-trade policy without measures to reduce leakage, the price of emission permits is $12 per ton of CO2 and emissions in other regions increase by 46% of the reduction in emissions in California. When imported electricity is included in the program and resource shuffling is banned, the carbon price is $65, there is negative leakage to regions exporting electricity to California, positive leakage to other regions and the overall leakage rate is 2%. We conclude that although there is potential for large increases in emissions elsewhere due to California’s cap-and-trade policy, enforcement of requirements for imported electricity will be effective at curtailing leakage.