Research spotlight: carbon leakage to developing countries

What is carbon leakage, and why does it matter? Julian Marenz (PhD student in Economics, London Business School) joined us to discuss the complex impact of European carbon taxes on developing countries, and the Wheeler Institute for Business and Development research project that is trying to measure it.

Tell us more about the research study, ‘The effects of taxing carbon emissions on carbon leakage in developing countries’. 

We wanted to investigate how carbon emissions leak to developing countries as a result of environmental regulation in developed countries. In particular, our research has a focus on the impact of carbon taxes, because they create an incentive for multinational firms to outsource their emission intensive activities to other countries where there is less regulation. 

Carbon taxation differs across European countries – some countries, like Germany, the Netherlands and Belgium do not have a carbon tax. Other countries like France and Spain however, which have had a carbon tax since 2014, which makes it more expensive for European multinationals operating in these countries to emit carbon. Our question is: what happens to multinational firms in European countries that are either affected or not affected by carbon taxes? 

Climate change is a global problem, so it doesn’t matter whether emissions come from the UK, Germany, or Ghana – in the end, what matters is the concentration of carbon in the atmosphere.  

What are your methods? 

Firstly, we construct ownership trees of multinational companies using a database called Orbis. The hypothesis that we’re testing is whether multinational parents from Germany that have subsidiaries in Africa outsource their pollution differently to British multinational parent companies, since Germany is not subject to a carbon tax.  

There is a difficulty in measuring emissions, because there are no reporting standards that would require subsidiaries for German or British companies operating in Africa to report how much they are emitting abroad. We have to rely on another way to estimate how much they pollute. We georeferenced subsidiaries of German and British multinationals in Africa. That means that we attached a latitude and a longitude so we know where they are based. We want to see how local emissions around these subsidiaries evolve. 

By using a database called EDGAR (Emissions Database for Global Atmospheric Research), we can analyse emission data on a global grid at the resolution 0.1 degree × 0.1 degree (approximately 11 km × 11 km at the equator). Using this data, we find that the introduction of a carbon tax does indeed lead to an increase in CO2 emissions around subsidiaries which have parent companies affected by this tax. There were some concerns about relying too heavily on this methodology, because it relies on estimates based on a range of statistics. 

Now, we are also using satellite measurements of NO2, which is a by-product of the burning of fossil fuels. Measuring NO2 is helpful in pinpointing emission sources because it dissipates quickly so it cannot travel far from its point of origin. This is a work in progress. We use measurements from space to look at emissions on the ground in Africa. We also use night-time luminosity measurements to speak to the economic development associated with increased investment in the areas around these multinational subsidiaries. 

What kind of inequalities might an increase in carbon tax in Europe lead to? 

Our research is not directly looking at the inequality consequences of these carbon taxes; we try to look more at the carbon consequences. Potential inequality consequences do, of course, exist outside of our scope. For example, poorer households spend a higher fraction of their income on petrol, which means that a rise in its price could exacerbate inequality. 

But the impact is more complicated than it may seem. If emissions abroad increase, then economic activity abroad potentially increases too. That could mean that these multinationals invest in Africa, which could raise living standards. It is important for policy makers to weigh the relative importance of emissions versus potentially improving living standards. 

How was the project involved in the recent Business Schools for Climate Leadership conference in Barcelona? 

The conference was one of the first times leading business schools have come together to really discuss sustainability. People learned a lot from each other about how we are representing, researching, and tackling climate change. Our involvement was a part of that open dialogue between researchers, policy makers and business leaders who had come together to discuss a range of key issues relating to climate and sustainability. 

What is the potential impact of this research? 

The outcome of this research aims to provide clarity on the repercussions of carbon prices on economy, production and employment. It will help assess the effectiveness of carbon-pricing policies and compare the benefits and costs of pricing carbon. This understanding will be instrumental in determining changes required in carbon-pricing policy to make it more viable politically, economically and socially. If the findings show that disadvantaged groups are disproportionately affected by carbon pricing compared to better-off groups, distributional transfers can be implemented to make the impact more equitable. 

The study will help both developed and developing countries identify the ripple effects of environmental policies on domestic industries and employment.

About the speaker

Julian Marenz joined the PhD programme in Economics at London Business School in 2022. Prior to that, he worked as a predoctoral research assistant at the Wheeler Institute for Business and Development at LBS. While he was there, Julian contributed to a multitude of projects concerned with economic history, environmental economics and political economy. His research interest is centred around those topics and beyond that includes international trade. 

Julian has graduated with a BSc in Economics and Business Economics from Maastricht university, spending his undergraduate exchange at UC San Diego. Subsequently, he completed the MSc Economics at the London School of Economics and Political Science.

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