The Economic Effects of an Alternative EU Emissions Policy

Abstract

This paper expands our earlier analysis to examine the implications of the median value for the 2010 European Union (EU) baseline emissions derived from the four economic modelling studies for both Annex 1 countries and non-Annex 1 countries as well as for the market price of permits. Our results suggest that, in terms of the reductions in the total abatement costs relative to the no trading case, the EU under the two trading scenarios examined gains as much as Japan and the US in the case of the high EU emissions baseline in contrast with our earlier examined, low official EU emissions baseline case where the US and Japan benefit much more from trading than the EU does. Moreover, the sharp increase in emissions reductions required of the EU drives up the total Annex 1 countries' demand for permits and hence the market price of permits, thus the gains of the Former Soviet Union as exporters of permits and of developing countries as suppliers of the clean development mechanism (CDM) credits increase substantially in the case of the high EU emissions baseline in comparison with the case of the low official EU emissions baseline case.

Keywords: Emissions trading, Clean development mechanism, Joint implementation, Greenhouse gases, European Union, Supplementarity restrictions

JEL Classification: Q28, Q25, Q48, Q43