United States Re-enters the 2015 Paris Climate Agreement: The Unexpected Twists and the Opportunity Costs? A CGE Approach

With renewed GHG emission reduction commitments and the rejoining of the Paris Climate Agreement of 2015 by the USA, this study attempts to examine the global economic implications of carbon emission reduction targets, including the opportunity cost the USA is likely to pay to implement its nationally determined commitments (NDC). The analysis employs the GTAP-E model and the GTAP database version 10 with a base year of 2014. Counter virtual experiments include eight simulation scenarios; however, we focus on scenarios 3 and 4, which evaluate global emission reduction with trading excluding and including the USA. Simulation results suggest that worldwide carbon dioxide emission trading significantly lowers the cost of implementing carbon dioxide emission reduction relative to the global carbon dioxide emission reduction under the no use of flexibility mechanism experiment. Besides, if the USA implements its NDC as intended in scenario 4, USA’s GDP will contract by 0.14%, while its welfare will contract by $74.24 billion. However, if the USA does not implement its NDC as in scenario 3, its GDP will contract by 0.07%, while its welfare will contract by $4.46 billion. Consequently, the USA’s opportunity cost of carbon dioxide emission reduction will be in the form of a decline in domestic output of 38.07% and 5.71% in coal, and the related contraction of 6.87% and 1.61% in oil, 61.23% and 9.62% in gas, 17.41% and 1.88% in oil products, 20.39%, and 2.92% in electricity, and 10.35% and o.37% in transport services, under carbon dioxide emission reduction with no use of flexibility mechanism and emission trading experiments, respectively.