Carbon Leakage is another issue with the Clean Development Mechanism. It is defined as increase in emissions outside a region as a direct result of the policy measures to cap emission in this region.
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This means that the domestic climate mitigation policy is less effective and more costly in containing emission levels, a legitimate concern for policy-makers.
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One example of the stringiest policies is Carbon Tax, or Carbon Cess applicable in many countries.
How does Carbon Leakage work?
We take an example of two countries A and B.
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Country A has a very strict emission policy and due to its stringent policy, the costs involved in the production increases.
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Country B has a less strict and flexible emission policy and due to this flexible policy, the costs involved in the production are less as compared to country A, keeping all other factors constant.
So, a company located in country A faces increased costs due to emissions pricing as a result of the strict climate policy. The company would take some action and as a result may decide to go for reducing, closing or even relocating the production to Country B with less stringent climate policies. This means that the Country A was though able to cut emissions, but now Country B will increase the emissions due to transfer of greenhouse gas
intensive industries from Country A to B. The result is more Green House Gases emission and more industrial jobs.
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This shift may be from Country to Country, Province to Province, Region to Region or any other way out.