Rethinking Carbon Leakage

Executive Summary

Dutch climate policy is too focused on the present. The debate on carbon leakage — the risk that emission-intensive production moves abroad — is dominated by short-term concerns. Policymakers often assume the current industrial structure and existing tax regimes will persist, leading to policy that protects today’s industries rather than preparing for tomorrow’s economy.

Carbon leakage risks are real but overestimated. Model studies suggest that 30 – 60 percent of emission reductions achieved through national carbon pricing may leak abroad if other countries do not act. Yet evidence remains limited, and the scale of leakage declines sharply when climate policies are coordinated at the European or global level.

Short-term focus distorts climate strategy. Current plans target 2030, which can exaggerate leakage risks and discourage ambition. Focusing on existing industries may delay innovation and lock in inefficient structures. Reliance on current tax and subsidy systems obscures the gap between actual carbon prices and the socially desirable price that reflects the full cost of emissions.

A long-term framework can rebalance policy. We propose an assessment framework that looks to 2050 and beyond. It compares domestic and foreign production processes based on their social — not just private — costs, and distinguishes three scenarios requiring different policy responses: (1) When foreign production is cleaner and cheaper, it is efficient to let it relocate; (2) When Dutch production is cleaner and competitive, pricing should be cautious to prevent harmful leakage; (3) When Dutch production is cleaner but more expensive, temporary subsidies can preserve strategically important sectors.

The goal is not zero leakage, but efficient transition. Some relocation will be unavoidable and even desirable if it lowers global emissions. The challenge for Dutch and European policymakers is to differentiate between productive and harmful forms of leakage — and to align pricing, subsidies, and regulation with the long-term social cost of carbon.

Policy recommendations

1. Extend the policy horizon to 2050 so that short-term leakage risks do not override long-term climate goals.
2. Base pricing and subsidies on the social cost of carbon, not on existing tax differentials.
3. Distinguish productive from harmful leakage, allowing relocation when foreign production is genuinely cleaner.
4. Identify sectors with future comparative advantages and plan support accordingly.
5. Integrate leakage scenarios into industrial and fiscal planning to ensure coherence between national and European policies.