Greening Global Trade: How Climate Policies Reshape Comparative Advantage of Developing Countries

This paper uses a combination of the global energy system model KINESYS and global computable general equilibrium (CGE) model ENVISAGE to analyze the impact of future climate mitigation policies. Results are subsequently linked to an atmospheric source-receptor model. Principal findings are as follows: (i) Holding global temperatures below 2oC requires significant policy effort. A uniformly applied tax of nearly $400 (2014 USD) per tonne of CO2eq is required. (ii) Ignoring benefits and co-benefits of mitigation policy, the cost to the global economy is relatively small. Holding global temperature rise below 2oC implies a loss of about 1.1% of global GDP. Using the revenue from carbon taxation to offset distorting taxes, as opposed to transferring carbon revenues in a lump sum manner to households, further reduces or reverses economic losses. (iii) However, benefits and co-benefits are significant. Benefits relate to reduced climate-related damages, such as lower frequency/intensity of extreme weather events. The co-benefit in focus relates to reduced air pollution. The monetized co-benefits of reduced air pollution substantially exceed the costs of mitigation alone by 2050 in most scenarios. Low-income countries experience a higher benefit-to-cost ratio compared to high-income economies. (iv) As mitigation effort increases, global trade-to-GDP ratios decline. Mitigation substitutes strongly traded fossil fuels for mostly domestically generated electricity. This downdraft on trade volume is a major and robust result. (v) The composition of trade shifts in logical ways, with production/trade in energy-intensive products tending to decline more and production/trade in less energy-intensive products tending to decline less.