Cooling down hot air: a global CGE analysis of post-Kyoto carbon abatement strategies

The Kyoto Protocol marks a breakthrough in global warming mitigation policies as it sets legally binding emissions targets for major emitting regions. However, realization of the Protocol depends on the clarification of several issues, one of which is the permissible scope of international emissions trading between signatory countries. Unrestricted trade produces hot air when signatory countries, whose Kyoto targets are well above their business as usual emissions, trade in larger amounts of “abundant” emission rights. Concerns on hot air motivated proposals for caps on emissions trading by the EU. These caps are strictly refused by the USA and other non-European industrialized countries who want to exploit the full efficiency gains from trade. In this paper we show that there are “cooling down” strategies which can reconcile both positions. International permit trade provides enough efficiency gains to make all signatory countries better off than they would be without permit trade while mitigating hot air. In other words, part of the efficiency gains from free trade could be used to pay for higher abatement targets of signatory countries which assure the same environmental effectiveness as compared to strictly domestic action or restricted permit trade.