The Economy-wide Effects of Global Climate Policy on the Russian Economy

COP21 meeting in Paris ended up with a global climate (non-binding) agreement, which proposes a very ambiguous, if not unrealistic, target of 2 °C. Among other countries, Russia proposed a reduction in GHG emissions. Russia’s pledge submitted to the UN is a 25-30% reduction in GHG emissions by 2030 compared to 1990 (Carbon Brief , 2015). At present, Russia is one of the largest producers of GHG emissions: Russia’s share in total GHG emissions accounted approximately for 5% in 2012 (WRI , 2012). Recently, a few publications address economy-wide effects from climate and energy policy in Russia (e.g., Heyndrickx et al., 2012). Yet their analyses are based on single-country models, which are unable to depict the response of other economies. Moreover, those studies do not show how the Russian economy could be affected, when other countries implement stricter climate policies. This study aims to fill this knowledge gap. From an economic point of view, what matter is overall welfare costs arising from climate policy. Therefore, many CGE studies typically focus on welfare effects from climate policy. But competitiveness, sectoral effects, and income distribution effects are also vital to policy-makers. It also should be noted that, according to results from CGE models, welfare costs of climate policy are typically moderate. In this study, we focus on competiveness and sectoral effects from climate policy. Therefore, the main objective of this paper is to quantify the sectoral effects resulting from a stricter climate policy in Russia and the rest of the word (RoW). Our analysis is based on a dynamic multi-region multi-sector CGE model, GRACE (Aaheim and Rive , 2009). We modify the core version of the model by disaggregating the electricity generation sector into seven sub-sectors: coal-fired, oil-fired, gas-fired, nuclear, hydro, bioenergy, and renewables. The model is calibrated around Version 9 of the GTAP database. We consider the following countries/regions: Russia, FSU, EU, Asia, and RoW. Two main experiments are carried out: In the first experiment, we implement climate policy in all regions excluding Russia, and in the second experiment, climate policies are implemented in all regions and Russia. The core simulations are supplemented by several sensitivity analyses to investigate the robustness of results with respect to key parameters. The rest of the paper is organized as follows. Section 2 provides an informal description of the model. Section 3 presents the results and discussion. Section 4 concludes. a stricter Russia's climate policy encourages of development of less energy-intensive sector. A removal of subsidies on domestic energy consumption results in energy efficiency improvement and a reduction in GHG emissions.