CoPS/IMPACT Working Paper Number G-328

Title: Adjusting Net Zero Emissions Pledges Under Global Permit Trade – Implications to Welfare and Consumption-based Emissions Pledges

Authors: Shenghao Feng, Xiujian Peng and Philip Adams


Many countries have made net zero emissions pledges (NZEPs). Who have made the most stringent pledges, and how to improve equity and efficiency of global mitigation efforts? We developed a dynamic computable general equilibrium (CGE) model to analyze these questions. We fitted the model with a new, endogenous CCS modelling mechanism, a new renewable power generation nesting structure, and an energy specific base case. Using this model, we build three scenarios up to 2050, namely 1) a ‘business as usual’ scenario, 2) a ‘net zero emissions pledges’ scenario (with two variants: with and without global permit trade) and 3) an ‘adjusted emissions pledges’ scenario, in which the existing NZEPs are adjusted in pursuit of improved equity under global permit trade. Our results show that without global permit trade, the developed regions would suffer more economically and import more emissions for their final use. By forming global permit trade, the world would enjoy higher mitigation efficiency, with the developed regions yielding most of these benefits, leaving some less developed regions to be worse off, while hurting global welfare (when higher inequality reduces global welfare). We demonstrated that, by making the more developed regions to pledge to even stronger abatement targets, it is possible to achieve a Pareto Improvement condition, in which no region is worse off because of permit trade. This would not only improve global welfare but also reduce the net transfer of carbon from developing to developed regions through trade. Our results lead to one important policy recommendation. Countries should work together to facilitate global permit trade and to ask the more developed regions to pledge to even lower, if not negative, emissions levels than their current NZEPs.

JEL classification: C68; Q4; R13

Keywords: Paris agreement, net zero emissions pledges, permit trade, equity, efficiency, welfare, CGE, GVC, trade embodied emissions, carbon neutrality

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