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Is International Emissions Trading Always Beneficial?

Abstract:
Economic efficiency is a major argument for international emissions trading under the Kyoto Protocol. We show that permit trading can be welfare decreasing for countries, even though private trading parties benefit. The result is a case of "immiserizing" growth in the sense of Bhagwati where the negative terms of trade and tax interaction effects wipe out the gains from trading. Simulation and welfare decomposition results based on a CGE model of the global economy show that under EU-wide trading countries that are net permit sellers generally lose, due primarily to the existence of distortionary energy taxes.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Environmental Market Design; Energy and the Environment – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, F18: Trade and Environment

Keywords: Emissions trading, Kyoto Protocol, CGE model, EU, EPPA-EU model

DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No2-2


Published in Volume 25, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.