Leakage from sub-national climate initiatives: The case of California∗

With federal policies to curb carbon emissions stagnating in the US, California is taking action alone. Sub-national policies can lead to high rates of emissions leakage to other regions as state-level economies are closely connected, including integration of electricity markets. Using a calibrated general equilibrium model, we estimate that California’s cap-and-trade program without restrictions on imported electricity increases out-of-state emissions by 46% of the domestic reduction. When imported electricity is included in the cap and “resource shuffling” is banned, as set out in California’s legislation, emissions reductions in electricity exporting states compensate for leakage elsewhere and overall leakage is 2%.