Unilateral climate change mitigation, carbon leakage and competitiveness: an application to the European Union

The setting of binding targets for CO2 emission reductions for 2020 by the European Union (EU) alone has led to concerns that unilateral climate change mitigation may not only hamper the union's competitiveness, but also result in carbon leakage. The paper explores these claims through the deployment of a dynamic, nonlinear, macro-econometric simulation called the Energy-Environment-Economy (E3) Model at the Global Scale (E3MG). In contrast to the generally held view, we argue that overall EU competitiveness may improve. We also argue that unilateral action may be effective in reducing global emissions relative to a no-climate-change-action scenario, although the reduction is very small.