Revisiting climate policy assumptions: What empirical market data reveal about substitution and leakage

Effective climate policy depends on realistic expectations about how markets adjust when the supply of low‑emission products changes. Yet many policy assessments—including those influencing forestry, vehicle, and energy sectors— rely on a simplified assumption that a change in supply of one product will lead to an equal and opposite change in the consumption of alternatives. The studies assuming a 100% substitution ratio rarely acknowledge it as a factor or test it using empirical evidence. We present a material‑balance model to represent how the U.S. softwood lumber market changes correlated to a major supply shock between 1988 and 1998. Using physical‑quantity data across hundreds of end‑uses and applications, we analyzed changes in product use under material‑balance constraints. We estimated that only 8.5% of the decade’s 81.5 million m³e y⁻¹ potential supply–demand gap was likely met through substitution. Additional correlated changes occurred through product leakage (31%), process and use‑stage efficiency (12%). This analysis offers the first estimate of an empirical substitution ratio for a market with hundreds of products, filling a long‑standing gap in climate‑policy assessment. To illustrate the policy relevance, we applied the empirically derived substitution and product leakage parameters to two mitigation scenarios. These showed that adopting empirical substitution ratios can materially change the estimated climate benefits of forest‑sector policies. This result held true in a sensitivity analysis. Our model offers an evidence‑based method for evaluating supply‑side climate interventions in material markets. This approach can support policymakers in re-evaluating their investments in light of real-world, albeit preliminary, substitution behaviors.