International Trade in Carbon Emission Rights and Basic Materials: General Equilibrium Calculations for 2020

Restrictions on carbon dioxide emissions affect international trade and the pattern of comparative advantage. This paper, based on calculations with a static general equilibrium model, suggests that international trade in carbon rights is a substitute for trade in energy-intensive goods, and thus international trading in carbon rights reduces sectoral effects of emission reductions. In our model, we surprisingly find that free riding by non-signatory countries may not render unilateral action ineffective. If the OECD unilaterally cuts global emissions by 5 percent from 1990 levels by the year 2020, emissions by non-OECD regions increase but offset less than 15 percent of this cutback. Moreover, carbon taxes depress international oil prices and create incentives for increased trade in natural gas.