Carbon leakage in the Steel Sector Accounting for Induced Technological Change and Spillover Effects : a Theoretical Analysis

Abstract: This analysis investigates the relationship between unilateral climate policy and the risk of carbon leakage in the steel sector. A simple analytical macroeconomic model is employed to highlight the various parameters influencing the magnitude of carbon leakage. An extended version of the model allows for assessing the impacts of induced technical change and technological spillover effects on the industry’s carbon leakage. A numerical illustration using sector-specific parameters shows that the leakage rate within the steel sector is 27%. Accounting for induced technological change and spillover effects reveals that higher rates of innovative activity reduce the risk of carbon leakage within the sector. In the presence of technological spillover effects under the assumption that the rate of technological change is 0.8, the carbon leakage rate reduces to 5%. The impact of induced technological change on carbon leakage in the steel industry implies that a global industrial network empowering the expansion of new technologies has the potential to decrease the industry’s overall emissions.