International Trade in Carbon Emission Rights: A Decomposition Procedure
Abstract
In recent years, a number of proposals have been advanced for the limitation of carbon emissions. Some have argued that such limits would be costless, but our analysis suggests that there is no free lunch. (See our forthcoming paper.) We have attempted to estimate the costs but not the global benefits of slowing down climate change through carbon limitations. All computations were performed in parallel for five geopolitical regions. Except for oil trade, these regions were treated independently-as though there were no opportunity for international trade in carbon rights. For stimulating ideas on the politics and economics of negotiating an agreement on greenhouse gas emission permits, see M. Grubb (1989). Whatever rule is adopted for the allocation of carbon emission rights, there are likely to be significant interregional differences in the value of these rights. International trade will be needed if economic efficiency is to be achieved. In the absence of such trade, there are likely to be significant distortions in the comparative advantage of individual locations for the production of tradeable basic materials such as primary metals. These distortions could lead to counterproductive regulations and new forms of nontariff barriers to trade. This paper is intended to quantify the potential for international trade in carbon emission rights.
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