Carbon motivated regional trade arrangements: Analytics and simulations

a r t i c l e i n f o This paper presents both analytics and numerical simulation results relevant to proposals for carbon motivated regional trade agreements summarized in Dong and Whalley (2010). Unlike traditional regional trade agreements, by lowing tariffs on participant's low carbon emission goods and setting penalties on outsiders to force them to join such agreements, carbon motivated regional trade agreements reflect an effective merging of trade and climate change regimes, and are rising in profile as part of the post 2012 Copenhagen UNFCC negotiation. By adding country energy extraction cost functions, we develop a multi-region general equilibrium structure with endogenously determined energy supply. We calibrate our model to business as usual scenarios for the period 2006–2036. Our results show that carbon motivated regional agreements can reduce global emissions, but the effect is very small and even with penalty mechanisms used, the effects are still small. This supports the basic idea in our previous policy paper that trade policy is likely to be a relatively minor consideration in climate change containment. This paper presents both analytics and numerical simulation results relevant to recent debate on carbon motivated regional trade agreements (see Chatham House, 2007 and Dong and Whalley, 2010). Proposals which circulate include explicitly lowering or eliminating tariffs among parties to a regional agreement on low carbon intensive goods and products used in low carbon technologies, border adjustments on trade with parties outside the area based on differential emission content of goods, and the use of trade sanctions against countries outside the area to enforce compliance with emission reduction targets set for them. Such proposals reflect an effective merging of trade and climate change regimes, and are rising in profile as part of the post 2012 Copenhagen UNFCC negotiations (see Walsh and Whalley, 2008 and Lockwood and Whalley, 2010). Here we discuss carbon motivated regional agreements in terms similar to customs union and regional trade agreements based literature (see Viner, 1950). We note that agreements with lower within-region barriers on low carbon intensive products need not reduce emissions globally if emission intensities of production differ sharply within and inside the region. This reflects the differential impact of trade creation and trade diversion on emissions. We also note that unlike conventional customs union literature the welfare effects of a regional agreement now also include welfare impacts on climate change from emission changes. We use a multi-region …