Climate campaigns, cap-and-trade and carbon leakage: Why reducing your carbon footprint can harm the climate

Abstract

Governments and environmental NGOs campaign for carbon footprint reductions by households. Many of the behavioral changes recommended reduce demand for goods produced by sectors covered by cap-and-trade schemes. With a binding cap, greenhouse gas emissions from those sectors do not change. I show that climate campaigns create leakage effects if coverage of cap-and-trade schemes is incomplete. Campaigns targeted at sectors subject to a cap increase aggregate emissions, as do campaigns to reduce carbon footprints generally if the capped sectors are emission intensive. However, campaigns targeting sectors not covered by a cap-and-trade scheme or propagating retiring of emission allowances reduce emissions. Keywords: Climate campaigns; carbon leakage; cap-and-trade schemes; green consumerism JEL codes: Q54; Q58; H31