International Trade in Carbon Emission Rights and Basic Materials: General Equilibrium Calculations for 2020

Abstract

Restrictions on CO, emissions affect international trade and the pattern of comparative advantage. This paper, based on calculations with a static general equilibrium model, suggests that international trade in carbon rights is a substitute for trade in energy-intensive goods, and thus international trading in carbon rights reduces sectoral effects of emission reductions. In our model, we surprisingly find that free riding by non-signatory countries may not render unilateral action ineffective. If the OECD unilaterally cuts global emissions by 5 per cent from 1990 levels by the year 2020, emissions by non-OECD regions increase but offset less than 15 per cent of this cutback. Moreover, carbon taxes depress international oil prices and create incentives for increased tradc in natural gas.

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