Carbon leakage is a concept to quantify an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with stricter climate change mitigation policies.
If demand for these goods remains the same, production may move offshore to the cheaper country with lower standards, and global emissions will not be reduced.
If environmental policies in one country add a premium to certain fuels or commodities, then the demand may decline and their price may fall.
Countries that do not place a premium on those items may then take up the demand and use the same supply, negating any benefit.
The issue of carbon leakage can be interpreted from the perspective of the reliance of society on coal, oil, and alternative (less polluting) technologies, e.g., biomass.
[5] The potential emissions from coal, oil and gas is limited by the supply of these nonrenewable resources.
One of the negative effects of carbon leakage is the undermining of global emissions reduction efforts.
This might lead coal-rich countries to use less coal and more oil and gas, thus lowering their emissions.
[5] While this is of short-term benefit, it reduces the insurance provided by limiting the consumption of oil and gas.
If the arrival of alternative technologies is delayed, the replacement of coal by oil and gas might have no long-term benefit.
[5]By taking into account the potential delays in alternative technologies and wider substitution effects, policymakers can develop strategies that minimize leakage and promote sustainable emissions reduction.
[6] For energy-intensive industries, the beneficial effects of Annex I actions through technological development were viewed as possibly being substantial.
[9] Recent North American emissions schemes such as the Regional Greenhouse Gas Initiative and the Western Climate Initiative are looking at ways of measuring and equalising the price of energy 'imports' that enter their trading region[10]