The Costs of Green House Gas Emission Reductions in the European and Japanese Economies under Alternative Emission Trading Regimes

Following the successful outcomes of the COP6 meeting in Bonn in July 2001, it is likely that the path to the adoption of the Kyoto Protocol may still be well alive, despite the withdrawal of the US from the Protocol in March 2001. Among the remaining parties, the European Union and Japan are major players. In this paper, we look at the costs of achieving the Kyoto Protocol targets for the EU and Japanese economies under various assumptions. First we consider the case where the US remains committed to the Kyoto targets, with and without emission trading with the rest of the Annex 1 countries. Although this scenario is unrealistic, it serves to highlight the gains and losses from US participation in international emission trading. Next we consider the case when the US withdraws from its Kyoto targets altogether. Clearly, this will have a direct and significant effect on the overall Kyoto aggregate. The ‘indirect’ effects on Annex 1 countries, however, are relatively small. Finally, we also experimented with various emission trading regimes within the Annex 1 countries, where the total level of international emission trading is subject to an overall limit to satisfy the so-called supplementary provisions. It turns out that these provisions will have a significant effect on the macroeconomic and international trade variables of these countries but will have only a small effect the marginal cost of emission abatement as expected. We use the latest GTAP version 5 data base and the latest GTAP-E model for our experiments.