Unraveling the effectiveness and channel of unilateral anti-leakage policies

Identifying the effectiveness of anti-leakage policies across competitiveness, demand, and energy channels is crucial for unilateral climate policy design. Here we combine a global equilibrium model and channel decomposition approach to unravel the effectiveness of anti-leakage policies—free allocation system, carbon border adjustment mechanism (CBAM), and climate clubs—within the Europe Union Emissions Trading System. Free allocation (excluding power sector) and indirect emission costs aids reduce carbon leakage across all channels, but only to a limited extent. CBAM achieves negative leakage in competitiveness and demand channels but increases it in the energy channel. Voluntary climate clubs without penalties, mainly mitigate leakage among member countries, but are less effective for non-members in the demand channel. The Buchanan club, which imposes CBAM penalties on non-members, achieves the negative leakage, suggesting its potential to fully resolve leakage. However, these policies are less effective in the energy channel, potentially undermining efforts in other channels.