Climate Change and Reduction of CO2 Emissions: the role of Developing Countries in Carbon Trade Markets

The Kyoto Protocol provides a framework on reduction of greenhouse gas emissions from industrialized nations. These reduction targets would have economic impacts that will not only affect these industrialized countries but also other developing countries around the world. In this context, this paper analyzes the economic implications of reduction of carbon emissions from industrialized countries (Annex I countries under the Kyoto Protocol) and the participation of developing countries under different carbon trading scenarios, including Latin America. We use the GTAP-E general equilibrium model, which accounts for capital-energy substitution and carbon emissions associated from intra-industrial consumption to analyze the economic and welfare impacts of carbon emissions trading. The results show that the participation of developing countries such as China and India lowers the costs of emissions trading for Annex I and non-Annex I countries. For Latin America, the impacts vary depending whether a country is energy exporting (negative) or energy importing (positive) and whether the United States reduces emissions. For energy exporting countries, the impacts on welfare are negative mostly from a deterioration of the terms of trade from crude oil, gas and petroleum products, due to decreased demand from the Unites States and other Annex I countries.