Australia in an International Emissions Trading (ETS) Scheme: An Economic Evaluation Using the GTAP-E Model

We use the GTAP-E model to analyse two emissions trading scheme (ETS) scenarios under the cap-and-trade system at global level, building on pledges for abatement made by governments after the Copenhagen Accord (2009) and Cancun Agreement (2010). These pledges are used to allocate emissions targets for all the countries in 2020. In the first scenario, an ETS is formulated among Annex 1 countries only. In the second scenario, the ETS is expanded by adding three leading non-Annex 1 emitters – China, India and South Korea. The study shows that the cost of meeting emissions reduction commitments of Australia and other countries can be reduced by engaging in block-level emissions trading. According to the results, a permit price (price per tonne of CO2-e) of US$10.56 emerges with the ETS among Annex 1 countries. This price is reduced to US$6.32 when China, India and South Korea also joined the global ETS. Australia’s real GDP declines by 1.03 and 0.59 percent respectively in two ETS scenarios. Contrary to the widely held view, projections from the GTAP-E model suggest that the ETS has a modest overall economic impact on the Australian economy and globally. Our results confirm that selling permits to the world is not welfare enhancing; rather countries who buy permits improve their welfare.