Negative Carbon Leakage : evidence from South Asian Countries

WP 109-16

e test the ‘Carbon Leakage Hypothesis' using the gravity model for three South Asian countries, India, Pakistan and Sri Lanka. The analytical model captures the interaction between the sectoral carbon emission intensity of the selected commodities and the climate policy adopted by the trading partners of the three South Asian economies. This interaction variable determines the destination of export of high carbon intensive goods versus low carbon intensive goods, i.e., whether the destination is Kyoto-binding countries or not. We use data on the export of 18 selected commodities over the period of 2000-2012 to gauge the impact of the Kyoto Protocol on the export of carbon-intensive goods. We find evidence of negative carbon leakage in the case of goods exported from India and Sri Lanka as well as for the combined exports from the three countries while some evidence exists of positive carbon
leakage for goods from Pakistan. The study also finds that, whether positive or negative, the carbon leakage effect is commodity specific.