Welfare Cost for Europe of Non-Participation to the Market of Tradable Permits and Comparative Efficiency of Corrective Policies Towards Energy Intensive Sectors

European Union promotes the view that flexibility mechanisms provided by the Kyoto Protocol, and in particular tradable permits, should come in complement to domestic measures of GHG abatement, i. e. be very limited. For countries exhibiting abatement costs significantly higher than the price of permit which can be expected in a Annex B market, the welfare cost of limited participation may be fairly high. Correlatively, leakage in Energy Intensive Sectors can be expected to be more acute than for other Annex B countries. The paper assesses, through a world – multi country – multi sector – dynamic – general equilibrium model (GEMINI-E3), the welfare cost in the extreme case of an auto-exclusion of European Union from the market of tradable permits and the consequences for its Energy Intensive Sectors, compared to other Annex B countries supposedly fully participating to the market. Different European corrective policies in favor of EIS, and aimed at limiting leakage, are appraised and compared: leveling of the carbon tax applied to EIS to the world price of permit; output based allocations; derogatory participation of EIS to the market of tradable permits. The last policy emerges as the least costly for European Union, and able to capture most of the benefits which would accrue from a complete participation of European Union to the market of tradable permits. The paper highlights the sensitivity of the results to the abatement policies possibly implemented in Former Soviet Union, and the large uncertainties due to low reliability of economic and statistical information.