Effects of Restrictions on International Permit Trading: The MS-MRT Model

This paper assesses the economic impacts of carbon abatement programs proposed under the Kyoto protocol: the distribution of economic burden across countries and regions, the implications for international competitiveness, and the consequences of international permit trading. Our analysis is based on a dynamic global trade model which accounts for systematic differences in the energy efficiency of production in industrial and developing countries. Emission limits adversely affect the welfare of industrial and some developing countries, including all of the oil-exporting countries. Imports from Annex-B countries become more costly while demand for most developing country exports is reduced. Oil prices simultaneously fall, so the net impact on oil-importing developing countries is ambiguous. Energy-intensive industries have a strong economic incentive to relocate production to low-energy cost developing countries. Global trading in emission rights provides the lowest cost path to Kyoto, but it is unclear whether there are incentives for all non-Annex B countries to participate.