Diskussionsbeiträge: Serie II, Sonderforschungsbereich 178 "Internationalisierung der Wirtschaft", Universität Konstanz 154
This paper attempts to shed some light on what the incentives are for international participation in 'sub-global' carbon reduction initiatives. We use a six-region global general equilibrium trade and carbon emission model recently used by Whalley and Wigle to analyze the international incidence effects of various global carbon tax schemes. Here we modify this model so as to also capture the benefit side of reduced global warming by including emission reduction in the specification of preferences in each region. This change in model structure allows us to examine the strength of the incentives for sub-global arrangements to form with the aim of achieving reduced carbon emissions. Because there are no reliable estimates of the benefits from slowed global warming, we have adopted a procedure of evaluating incentives for any sub-global arrangements to be used relative to a reference point: 50 percent global emission reduction target, as in the 1988 Toronto call, is assumed to represent a full-participation global optimum, in which the sum of marginal country benefits from further global abatement exactly balance marginal country costs from further reductions in sue of carbon-based energy. A number of interesting points emerge from our calculations. Incentives for the larger regions to engage in unilateral emission reductions (including the U.S. which accounts for nearly 25 percent of global emissions) are surprisingly strong (more than half the assumed optimal 50% global reduction). The optimal reduction increases further when pairs of regions who each provide emission reduction benefits to the other are considered (more than 35 percent for North America and Europe). Also, terms-of-trade effects from such cuts help energy importers and amplify (in some cases substantially) the benefits to them of reduced emissions from slowed global warming. But both production and consumption-based cuts create spillover effects stimulating production or consumption in other regions, suggesting that sub-global arrangements to reduce emissions are more likely to be successful if accompanied by constraints on non-participants. The overall picture that emerges is that even with limited country participation in such schemes, significant emission reductions (given the assumed 50% full participation optimal cut) are still beneficial to participating countries.