Carbon leakage in a small open economy: The importance of international climate policies

A substantial literature investigates carbon leakage effects for large countries and climate coalitions. However,
little is known about leakage effects for a small open economy within a climate coalition. To fill this gap in
the literature, we incorporate international climate policies relevant for a small open EU economy into the
general equilibrium model GTAP-E. We focus our analysis on Denmark, but we show that our framework can
be applied to any EU economy. We find substantial leakage associated with an economy-wide CO2e tax. This
result is strongly affected by EU climate policies. We also present sector-specific leakage rates and find large
sectoral differences.