Where-to-Abate and Where-to-Invest Flexibility: An Integrated Assessment Analysis of Climate Change

Within the framework of a dynamic Computable General Equilibrium model this paper analyses the impact of trade restrictions on regional rates of return on capital, marginal costs of abatement and optimal climate policy. It will be shown that regional differences both in marginal costs of abatement and in the marginal productivity of capital are driven by market imperfection. With restrictions on international trade, the industrialized countries of the North exhibit higher marginal costs of abatement and a lower marginal productivity of capital than the developing nations of the South. Free trade not only in carbon emission rights but also in capital increases conventional welfare but stimulates carbon dioxide emissions which are not completely offset by efficiency gains in abatement. Nevertheless, depending upon the choice of the discount rate some kind of an invariance result is observed. JEL Classification: F21, Q25. Key-words: Climate policy, carbon emission trade, rate-of-interest differential, marginal cost of abatement, capital mobility, international capital market imperfection. ∗ Corresponding author: Prof. Dr. Gunter Stephan, Department of Applied Micro-Economics, University of Bern, Gesellschaftsstrasse 49, CH3012 Bern.