Trade Composition and Carbon Control Efforts: Carbon Leakage Revisit Based on Carbon Terms of Trade of China

This paper investigates the changing patterns of the carbon terms of trade (CTT) of China with its trade partners (55 countries) in 28 manufacturing sectors during the periods of 1996-2009. Using a Gravity-style estimation function, we analyzed about how China’s CTT was affected by the general environmental regulation strictness of its trade partners and to distinguish the potential difference in this impact between Annex I and non-Annex I countries. Our results confirm that, all else being equal, the environmental regulation of an Annex I country to have significantly higher impact on China’s CTT, therefore provide direct supportive evidence for the carbon leakage phenomena in China’s trade. This conclusion is supported by the estimation results from the majority of the 26 environmental regulation stringency measurement previously used in the related literature and found to be robust after taking into account the potential endogeneity of the decision to join the Annex I list. More significant and consistent results about the higher impact of bilateral trade with annex I countries on China’s CTT were also observed when the precision was given to the actual commitment of Annex I countries carbon reduction target.