More Gas, Less Coal, and Less CO2? Unilateral CO2 Reduction Policy with More than One Carbon Energy Source

Abstract

We examine an open economy’s strategy to reduce its carbon emissions by replacing its consumption of coal—very carbon intensive—with gas—less so. Unlike the standard theoretical approach to carbon leakage, we show that unilateral carbon-reduction policies with more than one carbon energy source may turn counter-productive, ultimately increasing world emissions. We establish testable conditions as to whether a governmental emission-reduction commitment warrants the exploitation of gas, and whether such a strategy increases global emissions. We also characterize this strategy’s implications for climate policy in the rest of the world. Finally, we present an illustrative application of our results to the US.