Would different methodologies for assessing carbon leakage exposure lead to different risk levels? A case study of the Brazilian industry

Energy-intensive industries play an important role in low-carbon development, being particularly exposed to climate policies. Concern over possible carbon leakage in this sector poses a major challenge for designing effective carbon pricing instruments (CPI). Different methodologies for assessing carbon leakage exposure are currently used by different jurisdictions, each of them based on different approaches and indicators. This paper aims to analyse the extent to which the use of different methodologies leads to different results in terms of exposure to the risk of carbon leakage, using the Brazilian industry sector as a case study. Results indicate that carbon leakage exposure is an expected outcome of eventual CPI implementation in Brazilian industry. However, results vary according to the chosen methodology, so the definition of the criteria is paramount for assessing sectoral exposure to the risk of carbon leakage. Key policy insights Despite increasing discussion about the implementation of carbon pricing on the Brazilian industrial sector, the evaluation of carbon leakage risks is still neglected. Assessments of the risk of carbon leakage are directly related to the indicators and criteria used by each methodology. Thus, a given subsector may present different levels of exposure to carbon leakage depending on the methodological choice. More than a purely technical discussion, the methodological definition of carbon leakage risk is a political discussion - it can be well-conducted, leading to the success of a CPI, or even sabotaged, by implicitly subsidizing energy-intensive industries.