Carbon Tax, Carbon Leakage and the Theory of Induced Innovation in the Decarbonisation of Industrial Processes: The Case of the Port of Rotterdam

Abstract

A higher price of CO2 emissions is required to enhance the industrial transition and investment in low-carbon technology. However, the specific mechanisms to tackle the risk of carbon leakage and create an attractive environment for green investment are highly contested in the academic literature. Opposing perspectives regarding the appropriateness and desirability of government intervention in the economy result in different approaches to the decarbonisation of industrial processes. This research builds on existing academic knowledge in the fields of carbon leakage, induced innovation and government intervention to assess the effects of a carbon tax in the industrial cluster of the Port of Rotterdam within the context of a carbon tax on industrial GHG emissions proposed in the Dutch National Climate Agreement. The main finding of this study shows that investment leakage constitutes the main threat instead of carbon leakage in the face of a higher carbon price. Regarding the theory of induced innovation, limited abatement options are available for the industrial cluster and there is the need to scale up existing technologies. Lastly, to both tackle the risk of investment leakage and enhance the scaling up of low-carbon technologies, government intervention in the form of regulations, subsidies and enabling conditions is vital.