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Industry-Level Emission Trading in the EU

lowest costs. The main reason is that - based on our official projections - its effective
aggregate reduction requirement is much lower than those of USA, JPN and OOE.

Carbon abatement in large open economies may produce substantial spillovers on trading
countries due to the implied changes in international prices, particularly on world markets
for fossil fuels. We can directly monitor these spillovers for regions that do not have to
implement abatement measures.⁵ Among Annex-B regions, EIT and FSU have abundant
carbon emission rights, but they are nevertheless affected in different ways by abatement in
the OECD countries. While EIT faces a secondary benefit, FSU suffers from a secondary
loss. The primary explanation is that EIT, as a large fuel importer, benefits from falling
world market prices of fuels (as a consequence of decreased world demand) whereas FSU,
as a fuel exporter, faces a revenue loss. The same reasoning applies for fuel exporting
MPC. The terms-of-trade effects on fossil fuel markets may be strengthened or weakened
by shifts in comparative advantage on non-fossil fuel markets depending on a country's
initial trade relations and the effective carbon tax. ROW, e.g., will suffer income losses
with respect to its fossil fuel exports. However, these losses are more than offset by
additional income from increased world market shares in trade of non-energy goods
associated with its energy cost advantage as compared to OECD countries.

⁵ For a straightforward decomposition of the total general equilibrium effect into a
domestic market effect keeping international prices constant and an international market
effect that accounts for terms-of-trade effects see Bohringer and Rutherford 1999.

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