Climate change: who will take the heat

Climate change policies can regulate greenhouse gases (GHG) at a variety of points in the product cycle of fossil fuels: from fossil fuel suppliers based on the carbon content of extracted fossil resource to nal emitters at the point of energy generation. This paper develops a general equilibrium model with trade between fossil resource abundant countries and capital abundant countries to show that the distributional impacts of a climate policy di er depending on where emission rights are allocated along the GHG supply chain. The allocation of rights among di erent entities along this supply chain impacts both factor prices and each country's endowments, hence it impacts the trade equilibrium. We provide an illustration of the distributional impacts of climate policy in the FPE equilibrium by comparing four allocation rules that are based on grandfathering or on equity concerns.