Contraction and Convergence of carbon emissions:: an intertemporal multi-region CGE analysis

In the context of climate protection policy, it has been suggested that global CO2 emissions should be reduced significantly (contraction) and that per capita emissions should gradually be equalized across countries (convergence). This paper uses an intertemporal multi-region computable general equilibrium model of the world economy to assess the economics of "Contraction and Convergence" (C&C). Upon comparing a regime of tradable and non-tradable emission rights for implementing C&C, we find that international emissions trading increases crucially the political feasibility of the C&C proposal. The reason is that the distribution of the total efficiency gains from permit trading not only improves the economic well-being of all regions as compared to strictly domestic action, but in particular raises economic welfare of major opponents to carbon restrictions from the developing world even beyond non-abatement baseline levels. A decomposition of the general equilibrium effects associated with C&C shows that changes in the terms of trade constitute a key determinant of the overall welfare effects. (C) 2004 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.