January 16, 2011

The Implications of Alternative Biofuel Policies on Carbon Leakage

by Dusan Drabik, Harry de Gorter and David R. Just

- We show how leakage differs, depending on the biofuel policy and market conditions. Carbon leakage is shown to have two components: a market leakage effect and an emissions savings effect. We also distinguish domestic and international leakage and show how omitting the former like the IPCC does can bias leakage estimates. International leakage is always positive, but domestic leakage can be negative. The magnitude of market leakage depends on the domestic and foreign gasoline supply and fuel demand elasticities, and on consumption and production shares of world oil markets for the country introducing the biofuel policy.

Dusan Drabik, Harry de Gorter and David R. Just (2010). "The Implications of Alternative Biofuel Policies on Carbon Leakage." Charles H. Dyson School of Applied Economics and Management, Cornell University, WP 2010-22, Dec 2010.