Key Details
The OECD’s Unpacking the Economic Drivers and Dynamics of Climate Mitigation Policy Spillovers models 16,384 possible coalitions among 14 regions. Each participating region introduces an additional tax that gradually reaches US$100 per tonne of greenhouse gas emissions by 2040.
Model Finding | Result |
|---|---|
India in a global coalition | Emissions fall by roughly 55% and GDP is about 0.3% above the 2040 baseline |
India outside a coalition | It is among the largest destinations for emissions displaced from participating economies; some production shifts to India |
Wider cooperation | Once a coalition covers about 25% of global emissions, economy-wide carbon leakage narrows to 2–6.5% in the model |
Sectors most affected | Emissions-intensive, trade-exposed industries and transport account for 46–70% of economy-wide leakage |
Carbon leakage means that emissions rise outside a climate-policy coalition as production shifts or cheaper fossil fuels encourage their use elsewhere. The percentages above compare modelled outcomes with a current-policy baseline, not with today’s emissions or GDP.
India’s Power-Sector Options Change the Economic Result
Carbon taxes generally impose economic costs in the OECD’s scenarios, but India is an exception. The model assumes substantial potential for comparatively low-cost renewable electricity while its baseline remains heavily reliant on fossil-fuel power. Carbon pricing brings forward a shift in generation, producing efficiency gains that outweigh other modelled costs. India also shows a positive GDP effect when acting alone.
That is a consequential finding, but a conditional one. The paper does not recommend that India adopt a US$100 taxor predict that a real tax would raise GDP. Its baseline includes policies implemented only up to 2023, and its GDP estimates exclude both avoided climate damages and additional innovation induced by stronger climate policy.
Staying Outside a Coalition Does Not Insulate India
When other economies act and India does not join their additional policy, the model shows some production—and associated emissions—moving to India. Its cost competitiveness, domestic market and export capacity make it a potential alternative supplier, including for emissions-intensive goods.
That shift is not an unqualified economic gain. Countries outside a coalition can lose export demand when incomes and activity weaken inside it. The study finds that such trade and energy-market spillovers generally grow as climate-policy participation expands.
Cooperation Cuts Leakage, but Industry Remains Exposed
Wider participation leaves fewer places for emissions-intensive activity to relocate. The OECD finds that even a coalition covering around a quarter of global emissions sharply reduces the range of economy-wide leakage. Lower demand for fossil fuels also reduces emissions from their extraction as coalitions become very large.
The aggregate result does not remove sectoral pressures. Steel, cement, chemicals, other emissions-intensive manufacturing and transport remain important channels through which production and trade can shift. Fossil-fuel prices, rather than factory relocation alone, are the study’s dominant explanation of leakage across the economy.
Policy Relevance
The paper gives India two reasons to pay attention to climate policies set elsewhere: they can change demand for Indian exports and alter the competitiveness of domestic industry, whether or not India adopts the same instrument. Conversely, the model suggests that the economics of domestic mitigation depend strongly on the cost and availability of clean electricity.
These are reasons to examine sector-specific trade exposure, power-sector choices and international cooperation together, not to treat the model’s GDP or emissions figures as policy targets. The OECD tests a deliberately uniform tax across hypothetical coalitions; it does not model the full mix of Indian policies, border measures, finance or technology transfers that would shape an actual transition.
Follow the Full Paper Here: Unpacking the Economic Drivers and Dynamics of Climate Mitigation Policy Spillovers