Environmental policy and the CO2 emissions embodied in international trade

As polices to curb carbon emissions are not implemented similarly across countries, a so-called ’carbon leakage’ may offset domestic carbon reductions at the global level by redirecting CO2-intensive production to places with less stringent environmental regulation. This article uses a standard gravity model with panel data to assess whether a tightening in environmental policy plays as an incentive to offshore highly polluting activities. Our results show no evidence of carbon leakage through international trade. On the contrary, stringent environment policy leads to a reduction in CO2 emissions embodied in traded goods, both from the exporter and the importer’s side. Such results are robust to focusing on trade between emerging and advanced economies. Emissions embodied in trade are rather explained by usual trade determinants, such as shipping costs or income, and the energy intensity of goods produced by the exporting countries.