Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?

Carbon pricing has proven to be effective in reducing regional carbon emissions, but it has also resulted in carbon leakage, one way to handle this is a carbon tariff, but controversial. This study examines the role of carbon tariffs in mitigating carbon leakage. It proposes various carbon tariff schemes that take into account both direct and embedded carbon emissions. The research findings demonstrate that carbon tariffs focusing solely on direct emissions are insufficient in curbing carbon leakage. This is because such strategies tend to impose high tariffs on energy-intensive industries, leading to increased imports of indirect‑carbon-intensive products and exacerbating carbon leakage. Therefore, it is crucial to consider embedded carbon emissions when designing carbon tariff policies. This study provides a comprehensive analysis of the implications of different carbon tariff schemes on various industries and commodities. It advocates for the implementation of carbon tariff schemes that specifically target products with high embedded carbon emissions, thereby further reducing carbon leakage. In summary, this study identifies two key factors for mitigating carbon leakage: addressing embedded carbon emissions alongside direct emissions, and taking into account the opportunity cost associated with carbon emissions resulting from unit consumption within the carbon pricing region.