Assessment of European Union transition scenarios with a special focus on the issue of carbon leakage

This paper uses the model GEMINI-E3 to simulate and assess the transition scenario to 2020 framed by the European Union in its “Energy–Climate” Directive, and it raises several issues in this connection. After a brief description of the model, the paper presents the results of the scenarios, mainly the values of the major indicators of carbon price — both in the ETS and in non-ETS sectors — and the welfare cost of the EU policy under the various configurations considered. While it is independent of the scenario in the ETS sector, in the non-ETS sector the value of carbon is very sensitive to the provisions of the Directive and in particular the option of resorting to the flexibility mechanisms. The welfare cost also varies significantly according to scenarios, and its value for the entire EU is more than double in the scenario closest to the Directive as compared to the least-cost one. The paper also addresses the very sensitive issue of carbon leakage and argues in favor of a new concept of “net leakage.” The analysis shows that while carbon leakage may affect some specific sectors, at the aggregate level it does not represent a real concern, with a magnitude of at most a few percent of GHG abatement by Annex B countries.