Economic implications for Australia and other major emitters of trading greenhouse gas emissions internationally

Abstract

We employ the GTAP-E model to analyse the short run effects of two emissions trading scheme (ETS) scenarios at global level subject to 2020 emissions targets. In Scenario 1, an ETS is formulated among Annex 1 countries only, while the ETS is expanded by adding China, India and South Korea in Scenario 2. The study shows that the cost of meeting emissions reduction commitments of Australia and other countries can be reduced by engaging in block-level emissions trading. In particular, a permit price of US$10.56 emerges with the ETS among Annex 1 countries. This price is reduced to US$6.32 when China, India and South Korea also joined the global ETS. Results show that the ETS has a modest overall economic impact on the Australian economy and globally. Results also confirm that selling permits to the world is not welfare enhancing; rather countries who buy permits improve their welfare.