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Industry-Level Emission Trading in the EU

parameterization of our analytical framework. In section 3 we present our scenarios and
interpret the computational results. In section 4 we summarize.

2 Analytical Model and Baseline Calibration

For our analysis, we use a general equilibrium model of the world economy featuring 7
sectors (5 of which are energy sectors) and 23 regions (15 of which are EU member states).
The choice of sectors captures key dimensions in the analysis of carbon abatement such as
differences in carbon intensities and the scope for substitutability across energy goods and
carbon-intensive non-energy goods. The regional aggregation covers the Annex-B parties
as well as major non-Annex-B regions which are central to the greenhouse gas issue. Table
1 summarizes the sectors and regions incorporated in the model.

The functional forms and key model assumptions are standard within the CGE approach to
carbon abatement policy analysis (see e.g. Bohringer 2000). A detailed algebraic summary
of the generic model is given in the Appendix.

The costs of complying with Kyoto depend crucially on the extent to which the emission
reduction commitments bind economies in the budget period between 2008 and 2012. The
expected magnitude of abatement costs is directly linked to the structural characteristics of
each particular economy exhibited in the BaU situation without exogenous emission
constraints. For example, higher economic growth in the baseline will - ceteris paribus -
result in increased BaU emissions that imply higher compliance costs with the Kyoto
targets. On the other hand, energy efficiency improvements allow decoupling economic

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