In 2016, the majority of countries endorsed the Paris Agreement, with the goal of limiting global temperature increases to less than 2°C above pre-industrial levels. Achieving this objective hinges on the reduction of greenhouse gas (GHG) emissions. Given that fossil fuel combustion is a major source of GHG emissions, transitioning from fossil-based energy to clean energy is vital. This transition has led to a significant rise in global clean energy investments. According to the International Renewable Energy Agency, global annual investments in renewable energy nearly doubled from 2016 to 2022.

Despite the consensus on the importance of clean energy investment, there remains a gap in understanding its impact on carbon emissions, both within national boundaries and in terms of cross-border spillover. This knowledge gap arises from the interconnectedness of carbon emissions among neighboring countries, in the sense that clean energy initiatives in one country can influence and be influenced by similar factors in neighboring countries.  

A study by ACI, examining data from 2000 to 2018 for 72 countries, assesses these impacts. Employing a Spatial Durbin Model that corrects for the interconnected nature of carbon emissions, the study corroborates that local clean energy investments effectively reduce domestic carbon emissions. A 1% increase in such investment typically lowers domestic carbon emissions by about 0.05%, considering country-specific factors. Additionally, it also decreases per capita consumption of dirty energy (i.e., non-renewables) domestically.

Next, the study finds that clean energy investment in neighboring countries can inadvertently raise domestic carbon emissions and dirty energy consumption. The cross-border spillover impact is such that a 1% rise in neighboring countries’ clean energy investments leads to approximately a 0.3% increase in a country’s carbon emissions. This suggests ‘carbon leakage’, a scenario where companies in countries committed to clean energy relocate their high-emission production activities to neighboring nations with less stringent environmental policies. In other words, pollution is being outsourced from one country to another.

These findings carry significant policy implications. While national efforts in clean energy investment are key for reducing emissions, they alone are not enough to meet global decarbonization targets. The phenomenon of carbon leakage underlines the necessity of international collaboration in environmental policies. Countries with weaker environmental regulations risk becoming destinations for outsourced pollution from nations with stricter policies. Therefore, it’s crucial to develop a global framework for carbon emission control, shifting from isolated actions to a more cohesive regional and global approach in environmental governance. This should include strategies to prevent carbon leakage, such as border carbon adjustments, standardized pricing for carbon emission, and consumption taxes on high-emission activities.

By HUANG, Yijia

Researchers: WENG, Chunfei, HUANG, Jingong, GREENWOOD-NIMMO, Matthew