Carbon Markets and Carbon Tariffs: Effect on World Trade and Emissions

This appendix describes the global economic growth model used in Hu, Cao and Ho (2022) to simulate the impact of greenhouse-gas (GHG) emissions control policies and the parallel border carbon adjustment policies. Section 3 of the main text summarizes the main features of the model, here we provide the full list of equations of the model. 

This is a multi-sector, multi-regional general equilibrium model of world economic growth with a dynamic recursive structure, that is, with exogenous savings rates driving capital accumulation. The within-period structure of the economy is a standard formulation used in many CGE models; goods and factor markets are competitive, production technology has constant returns to scale and is represented by a nested series of constant-elasticity of substitution (CES) functions, imported goods are imperfect substitutes with local varieties, and labor is mobile across sectors. 

The within-period structure of the model is adapted from one used by Adkins et al. (2012) to study the leakage rates associated with US carbon prices combined with output-based subsidies (see also Adkins and Garbaccio 2007). That model is based on data from the Global Trade Analysis Project (GTAP) version 7, while our model is based on the latest GTAP10. 

Our focus is on the European Union carbon policies and leakage-reduction policies, and how they might affect trade flows. We also consider the possibility that the US and other regions implement carbon-leakage policies. This leads to the choice of 10 world regions, as listed in Table 1, which are the major exporters to the EU or major exporters of fossil fuels that will be most affected by GHG policies. The countries that have imposed explicit or implicit carbon prices are the more developed countries and we thus have a Rest of Annex I group that are countries listed in Annex I of the Kyoto Protocol, excluding those explicitly modeled – US, Canada, Russia, EU. Annex I countries have explicit targets under Kyoto. 

29 industries are identified in the model, as listed in Table 2. Six are energy related (coal, oil mining, gas, refining, electricity, gas utilities) and 15 are manufacturing ranging from low to very high energy intensity; these allow us to track the trade in commodities in some detail especially those that would suffer the biggest burden from a carbon price. 

The model employs standard neoclassical assumptions of competitive markets and constant returns to scale. The supply from each industry in each region is described by the behavior of a representative firm, and a representative household in each region governs consumption demand. We describe the sub-models for production, consumption, government and trade sectors in turn below. Then we turn to the model closures and market equilibrium in section A.5. The data sources and construction are described in A.6 where we present a summary Social Accounting Matrix. The model is implemented using the General Algebraic Modeling System (GAMS) (Brooke et al., 2006), and is specified and solved in levels. Download the full article.