Distribution Matters – Taxes vs. Emissions Trading in Post Kyoto Climate Regimes

The policy instruments for emissions reductions will be an integral part of a PostKyoto Climate Regime. Using the CGE model DART, we compare a harmonized international carbon tax to a cap-and-trade system with different emission caps. The carbon tax tends to favor industrialized countries while e.g. emissions trading under the “contraction and convergence” approach with converging per capita emissions leads to welfare gains for countries like China and India, whereas it imposes comparatively large welfare losses upon industrialized countries. Generally, regions exporting fossil fuels experience strong welfare losses from the reduced demand for fossil fuels associated with any climate policy.