ABSTRACT
Economists have long argued that the most efficient way to reduce global carbon emissions would be to place a global price on carbon. However, in reality we see no global agreement in sight on either carbon targets or prices. Furthermore, the UN Framework Convention on Climate Change (UNFCCC) enshrines the principle of common but differentiated responsibility (CBDR), which explicitly recognizes that developing countries should not be expected to implement the same kinds of policies as developed countries. In an environment of decentralized climate policy making, for countries that do seek to implement market-based policies for reducing carbon emissions, a major concern will be the potential for international trade to undermine the effectiveness of carbon pricing, the competitiveness of domestic industries, and domestic political support for strong measures. As a result, these countries may seek complementary measures to cope with carbon leakage.
