The theory that policy measures designed to reduce CO2 emissions in one country or region will result in an increase in emissions in another country as carbon intensive firms relocate to areas with less demanding environmental regulations.
For example, it is feared that steel plants and other heavy industries faced with planned carbon pricing regulations in the US may move their operations to countries such as China or India that do not have carbon pricing schemes in an attempt to avoid increased costs.
As a result, carbon emissions could simply "leak" from one country to another, resulting in no net reduction in emissions.
The Kyoto Protocol and the EU Emissions Trading Scheme have both been accused of causing carbon leakage, although there is little solid evidence as yet of firms relocating solely as a result of carbon regulations.
One of the primary drivers for a global agreement to tackle climate change is the hope that an international deal would remove the risk of carbon leakage by establishing comparable carbon regulations for all countries.
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