Industry-Level Emission Trading in the EU
also other Annex-B parties as well as major non-Annex-B regions. With its regional
disaggregation outside the EU, the model accounts for important changes on international
prices and trade flows triggered by the emission abatement of Annex-B parties outside the
EU. Apart from the detailed regional breakdown of the EU, another novelty of our model
is the incorporation of most recent information on future trends of the energy systems and
economic growth for individual EU countries based on comprehensive research undertaken
by the European Commission (EiE 1999).
Our analysis complements a recent study commissioned by the EU on the economic effects
of alternative trading schemes (Capros and Mantzos 2000). This study - based on a partial
equilibrium bottom-up model for the European energy system - identifies a similar order of
magnitude for the EU-wide costs of complying with the Kyoto targets under alternative
trading regimes. However, our results differ significantly from Capros and Mantzos with
respect to the distributional consequences of emission trading. The partial equilibrium
approach does not account for income effects due to shifts in the terms of trade, which may
account for a larger part of the total economic effect a country faces from multilateral
carbon abatement policies. Moreover, we show that alternative ways of recycling permit
rents may have important implications on the economy-wide efficiency of abatement
strategies.
The remainder of the paper is as follows. In section 2 we give a brief model summary,
motivate the importance of the BaU calibration, and describe the steps involved in the