Carbon leakage in production networks under asymmetric climate policies

Climate policies are typically designed at the regional level. This generates differences in implicit carbon prices across countries that can alter the structure of trade patterns and undermine the effectiveness of environmental regulations through carbon leakage. The paper examines the macroeconomic consequences of asymmetric climate policies, focusing on how they affect the international structure of production. The purpose is twofold: assessing the impact of uncoordinated climate policies on the outsourcing of production and studying the effectiveness of a border carbon adjustment mechanism aimed at safeguarding countries’ competitiveness. To this end, we develop and simulate a theoretical agent-based model in which supply chains are endogenously determined by downstream firms’ sourcing strategies; such firms select a supplier of intermediate goods, whose production generates emissions and is subjected to environmental regulations. Focusing on bottom-up interactions among heterogeneous and boundedly rational agents, this approach provides novel insights into how environmental policies rewire firm linkages within global production networks, and how this reshaping affects overall carbon emissions.