Carbon leakage refers to a theoretical concept where an emissions reduction policy implemented in one jurisdiction is compensated or nullified by resulting emission increases if the polluting activity or industry moves to another jurisdiction with less stringent regulations. This risk of carbon leakage is often raised and amplified by companies affected by climate policies as a justification for delaying, demanding exemption from or receiving compensation for the specific policy. The underlying drivers are often a lack of planning, limited access to capital and clean technologies, or their unwillingness to decarbonise their value chains.  

The topic of carbon leakage has been studied extensively in academic literature. The evidence, however, that climate policies are forcing companies to move abroad and pollute more elsewhere is lacking.

Some tools meant to reduce the risk of industrial carbon leakage have detrimental environmental and socioeconomic effects. The free allocation of allowances and indirect cost compensation under the EU Emissions Trading System has been proven to delay decarbonisation and have cost taxpayers hundreds of billions of euros in foregone revenue and windfall profits for corporations. The new Carbon Border Adjustment Mechanism is meant to address these shortcomings and failings. 

Another type of carbon leakage relating to carbon markets is when, for example, a project which aims to stop deforestation succeeds in doing so in the area covered by the project but deforestation outside the area accelerates. Projects are meant to account for this risk but tend to understate it.