Can we say with certainty that a carbon price policy in this country will generate a leakage of dirty industries to other nations without such measures? I don’t think we can. The need to buy permits (or pay a tax) in America would provide an incentive to move production overseas. That seems clear.

On the other hand, a carbon price would increase transport costs. Higher transport costs might well do three things. First, they might increase the incentive for producers to locate near large customer bases. Second, they might encourage producers to locate near suppliers. Third, they might encourage producers to locate close to transportation hubs providing low-carbon intensity shipping services (that is, rail or ship).

How these competing effects balance out is sure to be different for different industries, and some may well choose to migrate overseas. Others, however, may choose to migrate back. The net leakage effect is far from clear, as I see it.