Energy Policy 39 (2011) 36973708

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Environmental and economic effects of the Copenhagen pledges and more

ambitious emission reduction targets
Everett B. Peterson a, Joachim Schleich a,b,c,n, Vicki Duscha b
a

Department of Agricultural and Applied Economics, Virginia Polytechnic Institute & State University, 202A Hutcheson Hall, Blacksburg, VA 24061, USA
Fraunhofer Institute for Systems and Innovation Research Breslauer Strasse 48, 76139 Karlsruhe, Germany
c
Grenoble Ecole de Management, 12, rue Pierre Semard, BP 127, 38003 Grenoble Cedex 01, France
b

a r t i c l e i n f o

abstract

Article history:
Received 21 July 2010
Accepted 30 March 2011
Available online 20 April 2011

A multi-region, multi-sector dynamic computable general equilibrium model is applied to explore the
economic and welfare effects of the pledges submitted by developed countries (Annex I countries) and
major developing (non-Annex I) countries for 2020 under the Copenhagen Accord. In addition to
analyzing scenarios reecting the upper and lower bounds of the Copenhagen Pledges, one additional
policy scenario where Annex I countries as a group reduce CO2-emissions by 30% in 2020 compared to
1990 levels, and where major non-Annex I countries reduce CO2 emissions 15% below baseline, is also
analyzed. Economic effects are measured as changes in GDP compared to baseline and welfare effects
are measured via the equivalent variation. Assuming that countries with emission targets may trade
certicates, average reductions in GDP for countries with targets range between 0.1% and 0.7% in 2020
for the policy scenarios. While the GDP losses are larger for major non-Annex I countries with emission
targets compared to Annex I countries, this is not the case for the changes in welfare. With the
exception of Mexico, the welfare losses for the major non-Annex I regions, as a percentage of projected
GDP in 2020, are lower than for the large Annex I countries.
& 2011 Elsevier Ltd. All rights reserved.

Keywords:
Copenhagen Accord
Post-Kyoto
climate policy

1. Introduction
The main objective of the United Nations Framework Convention on Climate Change (UNFCCC) climate summit in Copenhagen
in December 2009 was to develop a Post2012 climate regime,
determining long-term greenhouse gas (GHG) emission targets
and the future contributions of Annex I and non-Annex I countries. According to the Intergovernmental Panel on Climate
Change (IPCC) fourth assessment report (Gupta et al. 2007),
carbon dioxide (CO2) emissions need to be reduced by 5085%
in 2050 compared to 2000 levels and must peak prior to 2020 if
the increase in global surface temperature is to be limited to 2 1C
compared to pre-industrial levels (2 1C target). As den Elzen
et al. (2010a) point out, pursuing upper climate policy targets
prior to 2030 may be vital in terms of reaching the 2 1C target,
because it is unlikely that higher emissions from earlier years can
be fully counterbalanced in future decades via a delayed action
type strategy. In 2009 the European Union (EU) and the G8
Summit recognized the 2 1C target and the necessity to reduce
global GHG emissions by at least 50% by 2050. The IPCC also
n
Corresponding author at: Fraunhofer Institute for Systems and Innovation
Research Breslauer Strasse 48, 76139 Karlsruhe, Germany. Tel: 49 721 6809203;
fax: 49 721 6809272.
E-mail address: joachim.schleich@isi.fraunhofer.de (J. Schleich).

0301-4215/$ - see front matter & 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2011.03.079

suggested intermediate targets for 2020, including an indicative

range of 2540% emission reductions compared to 1990 for Annex
I countries and a substantial deviation from baseline in Latin
America, Middle East, East Asia and Centrally-planned Asia
(Gupta et al., 2007, p. 776). For non-Annex I countries reductions
of 1530% below baseline have been suggested (den Elzen and

Hohne,
2008). According to European Commission (2009a) Annex
I countries should collectively reduce emissions by 30% in 2020
compared to 1990 levels and economically more advanced nonAnnex I countries need to decrease emissions by 1530% below
business as usual.
While the climate summit in Copenhagen failed to produce an
international agreement involving binding GHG emissions reduction targets, most Annex I countries pledged quantiable emission reductions under the Copenhagen Accord (UNFCCC, 2009). In
addition, several non-Annex I countries submitted nationally
appropriate mitigation actions (NAMAs) listed in Appendix II of
the Accord. In total, countries which submitted pledges under the
Copenhagen Accord account for about 80% of global GHG emissions. For most countries, pledges under the Copenhagen Accord
are quite similar to those made by Annex I and several non-Annex
I countries prior to the Copenhagen summit. For example, the
European Union promised a unilateral reduction of GHG emissions by 20% below 1990 levels by 2020 and a 30% reduction in
case an ambitious international climate agreement is reached

3698

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

(European Commission, 2009a). Countries like Australia and

Russia also pledged to reduce emissions, with tighter targets in
case an international agreement will be reached. In the United
States, the American Clean Energy and Security Act of 2009
(WaxmanMarkey) set an emission reduction target for 2020 at
17% below 2005 levels. While this bill has passed the House of
Representatives, the Senate has not considered this legislation
and chances of passing a bill including a national emission
reduction target in the near future are small. The failure to enact
national legislation on climate change would suspend the pledge
made by the US under the international climate change
negotiations.
An analysis of Copenhagen Accord pledges is difcult since
they leave ample room for interpretation concerning targets and
the use of offsets from exible mechanisms. Several Annex I
countries offer a range of emission reduction targets rather than
one specic number conditional on other countries agreeing to
similar efforts within the framework of an international agreement on climate change. In addition, quantication of the targets
is difcult as long as the rules for how to treat emissions from
land-use, land-use change and forestry (LULUCF) are not nalized.
Finally, most pledges do not sufciently specify to which extent
they rely on credits from the exible mechanisms or on surplus
Assigned Amount Units (AAUs) from the rst Kyoto Commitment
Period.
Previous studies analyzing the economic impacts of Copenhagen Accord pledges include Amann et al. (2009) and Wagner and
Amann (2009). Based on marginal abatement cost curves to
calculate mitigation costs they nd that these pledges lead to
reductions in gross domestic product (GDP) of less than 0.04% in
Annex I countries in 2020. As by the time these analyses were
conducted non-Annex I countries had not submitted any actions,
they mainly focus on Annex I countries and make assumptions for
the non-Annex I countries.
Den Elzen et al. (2010b) and Duscha et al. (2010) have
analyzed the economic effects of the pledges announced in the
Copenhagen Accord by Annex I and non-Annex I countries.
Allowing for international emissions trading, compliance costs
for the upper end of the pledges in 2020 for Annex I countries are
estimated to be less than 0.2% of baseline GDP in den Elzen et al.
(2010b) and less than 0.5% in Duscha et al. (2010). For non-Annex
I countries estimated costs are 0.17% of GDP in den Elzen et al.
(2010b) and around 1% of GDP in Duscha et al. (2010). Some
countries benet because their pledges allow them to sell
certicates, either because their own proposed targets are rather
lenient and result in revenues from selling surplus AAUs (notably
Russia), or because they have low-cost abatement measures
available (e.g. China and India). These analyses are based on
partial equilibrium models and therefore do not capture general
economic and environmental effects resulting from changes in
prices, income, exports and imports, or from carbon leakage,
i.e. an increase in emissions in regions without climate policies.
Such general economic effects are, among others, accounted for
by computable general equilibrium (CGE) models.
CGE models have recently been applied to analyze economic
effects of unilateral and multilateral emission reduction policies.

Studies on unilateral climate policies include Bohringer

et al. (2009)

for the EU, Bohringer

and Rutherford (2010) for Canada and US EPA
(2009) for the United States. Studies on multilateral climate policies
include Kemfert and Truong (2007), Kemfert and Schumacher
(2005), Gurney et al. (2009) Peterson and Klepper (2007) and
Dellink et al. (2010). The studies on multilateral long term targets
are based on dynamic CGE models and nd that global targets
consistent with the 2 1C target result in GDP losses compared to
the baseline of around 5% or less in 2050. In Kemfert and Truong
(2007) these losses reach 78% in 2050. Peterson and Klepper (2007)

nd that a path towards reaching a 40% reduction of global CO2

emissions relative to 1990 by 2050 lowers global welfare, measured

by equivalent variation, by 24% in 2030. Bohringer

and Loschel
(2003) consider hypothetical multilateral intermediate targets for
2020 based on expert judgments. Those targets, however, do not
match a two degree path but result in even lower emission
reductions (10%) than the pledges under the Copenhagen Accord.
Consequently, costs in terms of consumption losses are almost
negligible. Only Dellink et al. (2010) analyze various implementations of the Copenhagen pledges and nd economic costs in 2020 of
0.3% of GDP for both Annex I and non-Annex I countries and welfare
losses of 0.50.6% at the global level, 0.5% for Annex I countries, and
0.70.8% for non-Annex I countries.
In this paper we apply a dynamic CGE model to explore and
compare the environmental and economic effects of three multilateral emission reduction policy scenarios. Two scenarios, Lower
Pledges and Upper Pledges, capture the lower and the upper
bound of the emission targets announced by countries for 2020
under the Copenhagen Accord. We also analyze a scenario, based
on an illustrative example made by the European Commission
(2009a), where Annex I countries would collectively reduce
emissions by 30% and advanced non-Annex I countries would
reduce emissions by 15% below their baseline emissions in 2020.
In terms of environmental effects, we determine the impact on
global CO2 emissions in all scenarios and also assess the effects of
surplus AAUs from Russia as well as the impact of carbon leakage.
The economic effects of these proposed policies are measured by
changes in GDP, and effects on regional welfare are measured by
changes in the equivalent variation (EV).
The remainder of the paper is organized as follows. Section 2
describes the emission targets in 2020 for the three policy
scenarios. Section 3 presents the model used in the analysis. In
Section 4, we focus on the environmental effects, including
surplus AAUs from Russia and carbon leakage, and the economic
effects of climate policy on GDP and EV. The concluding section
focuses on policy implications.

2. Emission targets
The three policy scenarios differ by the stringency of emission
reductions and by the type of burden sharing across and
within different country groups. Since our model includes only
CO2-emissions, the reduction targets specied for all GHGs are
applied proportionally to CO2-emissions rather than to all GHG
emissions.
In the Lower and Upper Pledges scenarios, targets for Annex I
as well as large non-Annex I countries are implemented according
to their reduction targets submitted under the Copenhagen
Accord.1 The large non-Annex I countries with CO2-emission
reduction targets are Brazil, China, India, South Korea, Mexico
and South Africa. For China and India, the reduction targets are
based on carbon intensity targets and are calculated using real
(2004) GDP based on market exchange rates.2 All targets for nonAnnex I countries do not account for emission changes from
LULUCF; from deforestation and degradation (REDD); or from
1
http://unfccc.int/home/items/5264.php. See also Stern and Taylor (2010).
Policy scenarios were implemented in March 2010. Hence, pledges submitted
since then by Belarus, the Ukraine and Switzerland could not be considered in our
analyses.
2
If the carbon intensity targets were interpreted in terms of nominal GDP, the
emission reduction targets for China and India would be lower. The opposite
would be true if the intensity targets were measured using GDP based on
purchasing power parity (see den Elzen et al. 2010a). Den Elzen et al. (2010b)
further argue that the pledges by China appear less ambitious than measures
currently implemented or planned in these countries.

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

Table 1
Annual average growth of CO2-emissions between 2010 and 2020.
Region

Lower
Pledges

Upper
Pledges

30%
Annex I

Projected
growth

Percentage change
Australia
Japan
Canada
USA
EU27
Switzerland
Norway
Russia
Ukraine
China
South Korea
India
Mexico
Brazil
South Africa

0.45
 2.23
0.87
 1.78
 1.71
2.51
 3.60
1.90
 0.04
3.52
 1.59
5.31
 1.87
 1.38
0.03

 1.89
 2.23
0.87
 1.78
 3.01
2.51
 5.07
0.64
 0.04
2.62
 1.59
4.64
 1.87
 1.82
0.03

 3.45
 2.10
 1.98
 4.05
 3.01
 2.29
 3.33
 1.26
 1.72
1.96
0.34
4.10
0.05
1.47
2.59

0.90
0.93
1.83
0.58
0.31
1.25
1.25
 0.67
 0.04
3.63
1.98
5.81
1.69
3.14
4.27

Annex I
Non-Annex I with targets
Non-Annex I without targets
Global

 1.07
3.07
2.40
1.28

 1.65
2.37
2.40
0.76

 3.15
2.22
2.40
0.18

0.49
3.87
2.40
2.14

Based on CO2-emission projections from the EU ADAM-Project (van Vuuren et al.,

2009), adjusted for the economic crisis. Projected CO2-emissions do not include
pledged Kyoto emission reductions.

deforestation and degradation, conservation of existing carbon

stocks and enhancement of carbon stocks (REDD-plus). Other
factors that would lower global emission reductions but not
included in our analyses include surplus AAUs from the Kyotoperiod and double counting of emission reductions in a host
country and in the funding country of CDM projects.3 Additional
commitments on energy efciency, renewable energy targets and
nancial transfers are also not included.
The 30% Annex I scenario follows the illustrative example
made by the European Commission (2009b) where Annex I
countries are assumed to reduce emissions by 30%. A burdensharing rule is specied to divide the 30%-reduction target among
Annex I countries according to a multi-criteria approach, where
equal weights are applied to the following four indicators: GDP
per capita (in 2005) reecting a countrys ability to pay, GHG per
GDP (in 2005) reecting domestic emission reduction potential,
population trend (1990 to 2005) recognizing needs and GDP
trend (19902005) recognizing domestic early action. We also
include CO2-emission reduction targets of 15% below baseline in
2020 for Brazil, China, India, South Korea, Mexico and South
Africa. The targets for these countries correspond to the lower end

of the range suggested by den Elzen and Hohne

(2008) and by the
European Commission (2009a). Table 1 shows the average annual
growth rate of CO2-emissions for the baseline and the three policy
scenarios for all countries with emission targets.
Comparing CO2-emission growth across scenarios highlights
the differences in burden sharing across countries. Brazil, Mexico,
South Africa and South Korea made more ambitious commitments in the Copenhagen Accord than in our 30% Annex I
scenario. Conversely, China and India made smaller commitments
in the Copenhagen Accord than in our 30% Annex I scenario. The
same is true for Australia, Canada, Russia the United States and
in our implementation of the Copenhagen pledges also for

3
See den Elzen et al. (2010b) or Stern and Taylor (2010) for recent overviews
of these risks.

3699

Switzerland and the Ukraine. Japans commitments at Copenhagen are the same as in our 30% Annex I scenario. For the EU27,
emission reductions in our 30% Annex I scenario fall in between
the lower and upper ranges of Copenhagen commitments made
by the EU27.
One striking feature of the targets across the different scenarios is that the pledges for Russia involve substantial quantities of
surplus AAUs. Comparing the negative growth in projected
CO2-emissions to the positive growth implied by the Russian
targets in the pledges scenarios, the quantity of surplus AAUs
corresponds to about 350 (1 5 0) million tons of CO2 in the Lower
(Upper) Pledges scenario in 2020.
Table A-1 in the Annex presents targets for CO2-emissions in
2020 and compared to projected CO2-emissions at the global level
and for the aggregates of Annex I and non-Annex I regions. While
both Pledges scenarios reduce the projected growth of global
CO2-emissions between 2010 and 2020 by 40.364.4%, global
CO2-emissions will increase by 23.3% between 2010 and 2020 in
the Lower Pledges scenario and by 17.2% in the Upper Pledges
scenario. Even the more ambitious 30% Annex I scenario has
global CO2-emissions increasing by 10.6% between 2010 and
2020. Thus, none of these scenarios has the potential to obtain a
peak in global CO2-emissions by 2020 needed to meet the 2 1C
target. Wicke et al. (2010) estimate that the emission pledges
under the Copenhagen Accord will lead to a temperature increase
of around 3.5 1C.

3. Methodology
3.1. Description of DYE-CLIP model
A multi-country, multi-sector, recursive dynamic computable
general equilibrium (CGE) model, DYnamic Equilibrium Model for
CLImate Policy Analysis (DYE-CLIP) is used in this paper. The
sectors included in the model are electricity, rened petroleum,
chemicals, rubber and plastics products, other mineral products,
ferrous metals, paper products, other metal products, other
manufacturing, coal, oil, gas, transport, agriculture, other natural
resources, food, trade and services. The Annex I countries or
regions included in the model are Australia (aus), Japan (jpn),
Canada (can), the United States (usa), the European Union (EU27),
Switzerland (che), Norway (nor), Russia (rus), Ukraine (ukr) and
the Rest of Annex I countries (xa1). The Non-Annex I countries or
regions included in the model are China (chn), South Korea (kor),
India (ind), Mexico (mex), Brazil (bra), Indonesia (idn), Argentina
(arg), Turkey (tur), Egypt (egy), Rest of Non-Annex I Developed
(xna1d), Rest of Advanced Developing Countries (xad), Rest of
Other Developing Countries (xod), Rest of Least Developed Countries (xldc).
DYE-CLIP is based on the GDyn (Ianchovichina and McDougall,
2001) and GTAP-E models (Burniaux and Truong, 2002; Nijkamp
et al., 2005). The current version uses the GTAP 7 database (2004
base year). Households and rms are assumed to act perfectly
rational, maximizing utility and prots, respectively. Thus, the
model maximizes welfare (utility) rather than GDP. Further, the
model is myopic in the sense that only information available in a
given period is used by agents in their optimizing behavior.
Relative factor prices drive companies input portfolio and output
prices drive demand and supply. Prices adjust so that all markets
clear in all time periods. Climate policies are implemented via
CO2-emission quotas and national CO2-taxes on direct CO2-emissions. Because Peterson and Lee (2009) have shown that models
that do not include domestic trade and transport margins can
underestimate the level of a carbon tax needed to achieve a

3700

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

specic abatement target by 1015%, we include these margins in

the model to avoid underestimating macroeconomic costs.
The use of energy commodities (coal, oil and gas) as intermediate inputs is governed by a nested Constant Elasticity of
Substitution (CES) production function as used in the GTAP-E
model (Burniaux and Truong, 2002). Firms cannot substitute
among non-energy intermediate inputs or between non-energy
intermediates and a primary factor composite. The primary factor
composite is composed of land, skilled labor, unskilled labor,
natural resources and a capital-energy composite with a constant
elasticity of substitution between them. Within the capitalenergy composite, rms may substitute between an energy
composite and capital. There are also three inter-fuel substitution
possibilities: (a) electricity and the non-electricity composite;
(b) coal and the non-coal composite; and (c) between oil, gas
and petroleum products. As pointed out by Burniaux and Truong
(2002), the advantages of this specication are that it allows for
substitution between fuels and allows capital and energy to be
either substitutes or complements, depending on the chosen
values of the elasticities of substitution.4
A key model parameter is the elasticity of substitution
between capital and the energy composite, which we set equal
to 1.0. There is an extensive literature on whether capital and
energy are substitutes or complements, and what the correct
parameter value is. For example, according to Kemfert (1998),
who estimates elasticities of substitution for nested CES production functions for several industry sectors in Germany, energy and
capital are substitutes. The results of van der Werf (2008) also
provide support for using a substitution elasticity of 1.0. Given
that the model is solved in ve-year increments, a unitary
elasticity of substitution implies only modest substitution possibilities on an annual basis.
The direct consumption of energy commodities, mainly rened
petroleum products (e.g., gasoline) and gas, by households is
determined by their utility functions. Similar to the GTAP-E
model, both a private and government household is identied.
However, very small quantities of energy commodities are
purchased directly by the government household in all regions
in the GTAP 7 database. The demand for energy commodities by
the private household is governed by a Constant Difference
Elasticity of substitution (CDE) utility function, whose parameter
values are set to the base values in the GTAP 7 database. The CDE
function used does not nest energy commodities separately from
non-energy commodities. The uncompensated own-price elasticities for energy commodities are inelastic, with the most inelastic responses in non-Annex I countries. The income elasticities for
energy commodities are approximately unitary for most regions,
except for elastic income responses in some non-Annex I
countries.
A unique feature of the DYE-CLIP model is that it allows the
supply of coal, oil and gas to change as the prices for those
commodities change. In the GTAP-E model, the supply of coal, oil
and gas is governed by the amount of a natural resource
primary factor, which is specic to these sectors and whose
supply is generally assumed to be xed.5 In the DYE-CLIP model,
three new sector-specic primary factors are created for the coal,
oil and gas sectors. The initial value of these primary factors are
set equal to use of the natural resource primary factor by these
sectors in the GTAP database. A constant elasticity supply function is used for each sector-specic primary factor, with an
assumed supply elasticity of 0.25.
4
See van der Werf (2008) for a more detailed discussion on the nesting
structure for production functions for climate change policy modeling.
5
The natural resource primary factor is also used by shing, forestry, and
other mining sectors in the GTAP database.

3.2. Simulations
To have the year 2010 as the common starting point for all
policy scenarios, the model is rst solved for a single, six-year
period between the database year of 2004 and 2010. The emission
reduction targets under the Kyoto Protocol are implemented for
all Annex I countries, except the United States. In addition, no
emission targets are imposed on Russia and the Ukraine for 2010
to avoid introducing surplus AAUs from these regions. This
assumption may be rationalized by den Elzen et al. (2010c) who
argues that it may be in Russias best interest to refrain from
banking surplus AAUs from the Kyoto-period into the next
commitment period because revenues from selling certicates
would be higher in the post-Kyoto-period. In that sense, a lower
pledge by Russia could be interpreted as compensation for
renouncing banking surplus AAUs from the Kyoto-period. All
countries/regions with emission targets are allowed to trade
CO2-emissions certicates, resulting in the CO2-tax (or price
for CO2-certicates) being equalized across countries. Thus,
the CO2-tax for 2010 reects the marginal costs of achieving the
Kyoto-targets for all Annex I countries, excluding Russia, the
Ukraine and the United States. The model (implicitly) permits
unlimited banking within the six-year period, but not across other
time periods.
To determine the environmental and economic effects of the
policy scenarios, two model simulations are conducted. In the
rst (or forecast) simulation, projections of GDP growth, population/labor growth and CO2-emission growth developed and used
in the EU ADAM-Project (van Vuuren et al., 2009; Hulme and
Neufeldt, 2010; Edenhofer et al., 2010) and Poles model (Kitous
et al., 2010) by country are introduced into the model.6 These
projections have been adjusted for the current economic crisis. In
this forecast simulation, technological change is autonomous,
hence the model does not allow for price- or policy-induced
adjustment in the production function. The purpose of this
simulation is to determine how projected changes in income will
affect energy demand as well as how carbon intensity will change
if no policies or actions are taken to reduce CO2-emissions. The
same forecast simulation is used in all policy scenarios.
In the second (or policy) simulation, the CO2-emission reduction targets are implemented. For the three policy scenarios
considered, the CO2-emission targets listed in Table 1 are implemented for 2020 with intermediate targets for 2015 being linearly
interpolated.7 All countries with CO2-emission reduction targets
are allowed to trade CO2-emissions certicates. In fact, when
making their pledges, many countries implicitly or explicitly
assumed that certicate trading was viable. Although offsets such
as credits from CDM-type projects are not modeled, the regions
that currently host about 85% of registered CDM projects (http://
cdm.unfccc.int/index.html) are allowed to engage in emissions
trading in the model, thereby reducing the impact of not including these offsets. Additional nancing for mitigation activities in
non-Annex I countries is not considered in the scenarios. Banking
and borrowing is implicitly allowed within the two ve year
periods but not across. Even though the policy scenarios considered may lead to carbon leakage and undesired competitiveness effects, border tax adjustments or other trade measures are
not included in the model.8

6
Figures on projected CO2-emssions and GDP at the level of individual
countries and regions are available from the authors upon request.
7
Assuming an equal percentage of reduction for CO2 and non-CO2-emissions
may be particularly misleading for countries with a high fraction of emissions
from deforestation or LULUCF like Brazil or Australia and New Zealand.
8
Such measures are foreseen, for example, in the EU ETS and in the proposals
for future national GHG trading systems in the US. See, for example, Kuik and

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

Comparing the model results between the policy and forecast

simulations determines the environmental and economic effects
of the CO2-emission targets. Because it is not necessary to obtain
annual time paths to assess the impacts of the CO2-emission
targets in the three policy scenarios, the model is solved in two
ve-year increments for the period 20102020.

3701

Table 2
CO2-certicate prices (2004 $/ton).
Year

Lower Pledges

Upper Pledges

30% Annex I

2010
2015
2020

17.3
5.6
10.2

17.3
8.5
17.1

17.3
12.1
25.6

4. Model results
4.1. Certicate prices
Prices for CO2-certicates (in 2004 US$ per ton of CO2) in each
period are given in Table 2 for all policy scenarios. The 2010
certicate price of 17.3 $/ton, which is the same across all
scenarios, represents the marginal abatement costs of achieving
the Kyoto targets in the model. In 2015, the price of certicates
falls relative to the 2010 price in all scenarios. This occurs due to
the surplus AAUs for Russia and because China and India are
allowed to sell CO2-emission permits, which lowers the global
marginal cost of abatement. In 2020, certicate prices for both
Pledges scenarios remain at or below the 2010 certicate price.
Only for the 30% Annex I scenario, where larger CO2-emission
reduction targets for the Annex I countries lead to higher
marginal abatement costs, does the certicate prices in 2020
exceed those in 2010.

Table 3
CO2-emissions sales ( ) and purchases ( ) in 2020, million metric tons.
Region

Lower Pledges

Upper Pledges

30% Annex I

Australia
Japan
Canada
United States
EU27
Switzerlanda
Norway
Russia
Ukrainea
China
South Korea
India
Mexico
Brazil
Rest Annex I
Rest ODC

 43.3
 331.8
 106.9
 869.0
 446.4
0.0
 16.7
417.3
0.0
1580.1
 155.6
356.4
 124.2
 193.6
0.0
 65.5

 89.0
 306.1
 89.2
 624.3
 767.3
0.0
 18.9
270.0
0.0
1606.7
 136.0
395.4
 110.7
 197.1
0.0
66.4

 104.7
 264.9
 173.5
 1321.2
 672.6
 14.8
 14.4
70.3
 4.3
1840.9
 22.9
453.5
 24.3
 41.4
 75.2
369.9

2353.0

2338.4

2734.1

4.2. Emissions trading, surplus AAUs and leakage

Total sales

Table 3 shows the traded volumes of certicates for the

different countries and regions in 2020. Traded volumes are
endogenously determined and depend on a countrys CO2-emission target (compared to projected CO2-emissions) and on its
marginal abatement costs. Optimal trading and abatement strategies imply that countries facing tight targets and high abatement costs will purchase certicates from countries with more
lenient targets and/or low marginal abatement costs. Table 3 also
shows that, except for the Upper Pledges scenario, the US will be
the major buyer of certicates in 2020. In the Upper Pledges
scenario, the EU27 commits to a 10% point larger reduction in
CO2-emissions while the US commitment remains unchanged.
This larger reduction effort by the EU27 causes it to purchase
more certicates than the US in the Upper Pledges scenario. China
and India are two of the largest sellers of certicates across all
policy scenarios. In the Pledges scenarios, Russia is a major seller
of certicates due to surplus AAUs. Because Brazil, Mexico and
South Korea have much larger CO2-emission reduction commitments in the two Pledges scenario than in the 30% Annex I
scenario, these regions purchase signicant quantities of certicates in both Pledges scenarios.9 South Africa (part of Rest of ODC
in Table 3) also commits to larger CO2-emission reductions in the
Pledges scenarios, but does not actively buy or sell certicates in
these scenarios. However, in the 30% Annex I scenario, its smaller
CO2-emission reduction target allows it to be a major seller of
certicates in 2020.
Across all policy scenarios, a substantial share of required
reductions in CO2-emissions for regions with targets is achieved
via emissions trading. In relative terms, more certicate trading
occurs for the scenarios with lower certicate prices. In 2020,
(footnote continued)
Hofkes (2010) for an analysis of the economic effects and van Asselt and Brewer
(2010) for a treatment of the legal aspects for border adjustment measures.
9
Brazils position, however, would likely be different, if REDD and REDD-plus
were included in the analysis, since these measures have a high potential and are
relatively inexpensive.

Copenhagen Accord pledges by Switzerland and Ukraine are not considered.

about two thirds of the total reduction in CO2-emissions is

achieved via emission trading in the Lower Pledges scenario. This
share drops to under one-half in the Upper Pledges and 30%
Annex I scenarios. Higher certicate prices in these scenarios
render domestic abatement more cost effective.
Because projected CO2-emissions by Russia are below its
target in both Pledges scenarios, some of the traded certicates
are actually surplus AAUs. In 2020, the gross of surplus AAUs
CO2-emission reductions by all regions is about 3.2 Gt of CO2 for
the Lower Pledges scenario. Since projected CO2-emissions in
Russia are about 0.35 Gt of CO2 below its Lower Pledges target,
required CO2-emission reductions net of these surplus AAUs are
about 3.55 Gt of CO2.10 The total share of surplus AAUs in 2020 is
about 9.7% in the Lower Pledges Scenario. Similarly, the share of
surplus AAUs for the Upper Pledges scenario is approximately 3%.
In contrast, the 30% Annex I scenario does not result in surplus
AAUs for Russia. When comparing these results to other studies, it
needs to be remembered that banking of surplus AAUs from the
previous Kyoto period is not allowed in our policy scenarios. In
addition, no emission target is assumed in our Pledges scenarios
for the Ukraine.11
Because most Annex I countries are net buyers of certicates,
the level of CO2 abatement by Annex I countries is much lower
than the CO2-emission targets given in Table A1. Relative to
CO2-emissions in the forecast simulation, abatement by Annex I
countries range from 4.9% in the Lower Pledges scenario to 12.4%

10
For comparison, den Elzen et al. (2010c) estimate the magnitude of surplus
AAUs from Russia in 2020 at 0.42 Gt.
11
Estimates for the total surplus of AAUs at the end of the rst commitment
period in 2012 range between 9 and 13 Gt (den Elzen et al., 2010c; Rogelj et al.,
2010). If sold or used domestically to displace mitigation activity up to 2020, these
surplus AAUs reduce the stringency of 2020 emission targets and hence increase
estimates of 2020 emissions.

3702

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

Table 4
Overview of CO2-emission reductions compared to baseline and leakage in 2020.
Region

Lower
Pledges

Projected emissions

Percentage change

All countries
Annex I
Non-Annex I with targets
Non-Annex I without targets
Leakage (million Mt)
Percentage of reduction
Percentage of projected emissions
a

Upper
Pledges

30%
Annex I

 8.5
 4.9
 15.5
1.8

 12.8
 8.0
 23.0
2.9

 17.4
 12.4
 30.0
4.2

465.2
13.1
1.3

547.2
10.5
1.5

269.5
4.3
0.7

in the 30% Annex I scenario. Thus, actual abatement

by Annex I countries is only about one-third of their target
CO2-emission reductions, due to the purchases of certicates
from non-Annex I countries. Conversely, abatement by the nonAnnex I countries with emission targets is much higher than their
CO2-emission reduction targets. Abatement by these regions
ranges from 15.5% to 30.0% compared with projected CO2-emissions across the policy scenarios. This reects lower marginal
abatement costs in China and India due to the relatively high
carbon intensity in those countries. Overall, global CO2-emissions
in the policy simulation decline by 8.517.4% compared with the
forecast simulation across the three scenarios. This is slightly less
than the global CO2-emission reductions given in Table A1
because CO2-emissions in the forecast simulation include
CO2-emission reductions from the Kyoto period, and from carbon
leakage in the policy simulation.
In general, carbon leakage may result from two channels (e.g.
Paltsev, 2001; Burniaux and Martins, 2000). First, because climate
policy raises production costs in regions with emission targets,
some production may shift to regions without such targets and
partially offset some of the emission reductions (competitiveness
effect).12 Second, to the extent that climate policy translates into
higher prices for fuels in countries with emission targets, demand
for fuels declines and world fuel prices fall.13 Lower fuel prices
lead to higher demand and emissions in regions that do not
implement climate policies (world price effect). Since the focus of
the paper is on the overall contribution of leakage rather than on
the various sources for leakage, we do not distinguish between
competitiveness effects and world price effects.
The rates of carbon leakage are calculated by comparing
CO2-emissions in the policy simulations to CO2-emissions in the
forecast simulation for all regions without emission reduction
targets. As shown in Table 4, CO2-emissions from regions without
emission targets are 465547 million tons higher in the policy
simulations for the Pledges scenarios. For the 30% Annex I
scenario, the leakage is reduced to 269.5 million tons because
more countries/regions are subject to CO2-emission reductions. If
leakage is measured relative to the reductions in countries with
emission targets (as in Gupta et al., 2007), the leakage rate ranges
between 10.5% and 13.1% in the Pledged scenarios, but falls to
4.3% for the 30% Annex I scenario. If leakage is measured as a
share of projected global CO2-emissions (and hence based on the
same denominator across all policy scenarios), the leakage rate

See Reinaud (2008) for a survey of the literature on carbon leakage.

In the DYE-CLIP model, fuel supply is price responsive, hence dampening
the decline in prices in response to lower demand. The decline in world prices
would be dampened even more, if resource owners reacted strategically by
reducing supply in order to maintain a high price for fossil fuels.
13

Region

Lower
Pledges

Upper
Pledges

30%
Annex I

Percentage change

Kyoto emission reductions included in forecast simulation.

12

Table 5
Change in 2020 GDP compared to projected GDP.

All countries
Annex I with targets
Non-Annex I with targets
All countries/regions without targets

 0.19
 0.02
 0.86
 0.08

 0.31
 0.06
 1.40
 0.07

 0.48
 0.13
 2.04
 0.06

ranges from about 1.5% in the Pledges scenario to 0.7% in the 30%
Annex I scenario.14
4.3. Gross domestic product
One of the concerns of implementing climate change policy is
its potential impacts on economic activity and whether those
effects vary across countries or regions. Globally, the effects of the
alternative policies are modest. Compared to projected GDP in
2020, the reduction in global GDP ranges from 0.2% in the Lower
Pledges scenario to 0.5% in the 30% Annex I scenario. However,
the changes in GDP are not distributed equally across Annex I
countries, non-Annex I countries with emission targets and
countries without emission targets. Overall, reductions in GDP
for Annex I countries are small, ranging from an average of 0.02%
in the Lower Pledges to 0.13% in the 30% Annex I scenario (see
Table 5). The impact on countries/regions with no emission
targets is also small, averaging around a 0.07% reduction in GDP
across all policy scenarios. For non-Annex I countries with
emission targets, the reduction in GDP is much larger, averaging
from 0.86% in the Lower Pledges to 2.04% in the 30% Annex I
scenario.
As shown in Fig. 1, there is considerable variation in the
change in GDP across countries. For example, Russia, experiences
the largest reduction in GDP of any Annex I country, ranging from
0.8% to 2.2%. The lower growth in GDP for Russia mainly results
from a smaller increase in private consumption due to lower
growth in factor income (e.g. wages and returns on capital). In all
policy simulations, Russian output of coal, oil and gas is lower
than in the forecast simulation because of lower domestic and
export demand. Because climate policies result in lower global
demand for fossil fuels, their world prices are lower in the policy
simulation compared with the forecast simulation. Given the size
of these sectors in Russia, this leads to a considerably lower
demand for labor and capital and lower prices for those factors. In
the Pledges scenarios, the prots received from selling surplus
AAUs are not sufcient to compensate the loss in factor income.15
For non-Annex I countries with emission targets, China and
India experience the largest reduction in GDP in the policy
simulations. These reductions in GDP range from 1.1% to 2.9%
for China and from 1.2% to 2.2% for India. The larger reductions
in GDP from tighter CO2-emission targets occur because the
industrial sectors in China and India are more energy- and
CO2-intensive than in most other regions. As tighter CO2-emission
targets raises the price of CO2-certicates, CO2-emissions become
14
While the IPCC denition of leakage is suitable to measure leakage at the
aggregate level, it would be less suited to assess leakage at the sectoral level. See
Bernard and Vielle (2009) for an in-depth discussion.
15
Qualitatively similar ndings for Russia can be found in Dellink et al. (2010)

for the Copenhagen Accord pledges, or, among others, in Bohringer

and Vogt
(2003), for the impact of the Kyoto Protocol, which also involves substantial
amounts of surplus AAUs.

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

3703

1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0

Lower Pledges

Upper Pledges

xldc

xod

xad

xna1d

xa1

tur

egy

idn

bra

arg

mex

ind

kor

chn

rus

ukr

nor

che

usa

EU27

can

jpn

aus

-3.5

30% Annex-I

Fig. 1. Change in 2020 GDP compared to projected levels (%).

Table 6
Difference in 2020 industry output between policy and forecast simulations for
the Upper Pledges scenario.
Sector

Japan

EU27

China

India

 3.9
 4.3
 6.9
 4.8
 4.7
 5.5

 4.0
 5.3
 5.1
 3.3
 6.4
 15.1

Percentage change
Other manufacturing
Paper
Chemicals, rubber, plastics
Other mineral products
Iron and steel
Other metals

0.1
0.0
 0.1
0.7
0.6
0.5

0.2
 0.1
0.4
0.5
0.5
 0.4

more costly leading to higher output prices and larger reductions

in the production of energy-intensive sectors in China and India.
However, even though China and India have the largest reductions in GDP in 2020, their GDP growth remains very strong and
will still be 2.5 times higher in 2020 than in 2005.
While tighter CO2-emission targets lead to larger reductions in
GDP for countries like China and India, some Annex I countries,
notably the EU and Japan experience an increase in GDP.16 This
occurs due to the relative differences in energy- and CO2-intensities between regions. Whereas China and India are relatively
more energy- and CO2-intensive than other regions, the EU and
Japan are relatively less energy- and CO2-intensive than most
other regions. Thus a higher cost of CO2-emissions will have less
effect on the prices and make EU and Japanese rms more
competitive, leading to increases in output. Table 6 exemplies
this for selected sectors for the Upper Pledges scenario. For
example, steel production in China and India in 2020 is still more
than twice as CO2-intensive as in the EU. Hence, CO2-intensive
production sectors are much more vulnerable to higher certicate
prices in China or India than in Japan or the EU. Besides costs for
direct CO2-emissions, higher CO2-prices also affect the costs of
intermediaries, in particular of electricity. Thus, higher CO2-prices
may signicantly increase production costs for electricity-intensive sectors like chemicals, rubber and plastic products or other

16
Peterson and Klepper (2007) nd a similar effect for Japan, but do not
discuss this nding further.

metals such as aluminum. Because coal is the main fuel used to

generate electricity in China and India, electricity prices rise more
in both regions than in other regions. These price increases are
larger for tighter CO2-emission targets. For example, the electricity price increase in China is twice as large in the 30% Annex I
scenario compared with the Upper Pledges scenario and about
three times larger compared with the Lower Pledges scenario
in 2020.
Climate polices also lead to a reduction in GDP for Annex I
countries Australia, Canada, Norway and the United States.
Reductions in the demand for fossil fuels and electricity reduces
the demand for primary factors, leading to lower factor prices,
lower consumer income, and lower consumption. The reduction
in the returns to capital also reduces investment in these regions
as well. GDP increases for Switzerland (che) for the same reasons
as the EU and Japan. In the Pledges scenarios, GDP increases for
the Ukraine because it is not subject to emission reductions. This
result is reversed when emission targets are imposed in the 30%
Annex I scenario.
The effect of climate policies on GDP for other non-Annex I
countries and regions without emission targets is mixed. For
Egypt, Indonesia and the Rest of non-Annex I Developed Countries
(xna1d), whose economies have relatively large energy sectors,
climate policies lead to a reduction in GDP due to a reduction in
consumption from lower factor income. While the Rest of
Advanced Developing Countries (xad), which includes Venezuela,
and Rest of Least Developed Countries (xldc), which includes
Nigeria, also have relatively large energy sectors, GDP increases in
those regions. Increases in exports of non-energy commodities
help offset the reduction in energy commodity exports and lead
to larger investment in these regions. Finally, GDP increases for
Argentina and Turkey due to increased investment in both
regions, an increase in exports by Argentina and increased
consumption in Turkey.
While there are differences in regional aggregation, greenhouse gases included in the model and to which extent emission
trading is allowed, our results are similar to those of Dellink, et al.
(2010).17 For the Pledges scenarios, Dellink et al. (2010) estimate
17
The regional aggregation in ENV-Linkages Model used by Dellink et al.
(2010) is more aggregated than the DYE-CLIP model. Countries such as Mexico and
Korea are not individually identied. Unlike DYE-CLIP, ENV-Linkages includes
non-CO2 greenhouse gases. Neither model allows for LULUCF or for surplus AAUs

3704

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

a 0.3% reduction in global GDP in 2020 compared with a 0.20.3%

reduction in this study. The reductions in GDP for non-Annex I
countries are higher in this study than in Dellink et al. (2010)
while the reductions in GDP for Annex I countries tend to be
lower. Because Dellink et al. (2010) do not allow for emission
trading for their lower pledges scenario, but do allow trading for
their upper pledges scenario, the differences in GDP reductions
between their pledges scenarios is less pronounced than in
this study.

4.4. Welfare effects

The changes in GDP provide insight into the change in
overall economic activity from implementation of emission
targets, but they are not necessarily a good indicator of how
emission targets affect the well-being (or welfare) of individuals
in a given region. For example, a decrease in the price of imported
products will improve that regions terms-of-trade, leading
to an increase in welfare.18 Because consumers substitute
imported for domestic products, GDP may be lower even as
welfare increases.
The change in economic welfare from the implementation of
emission targets will depend on how this policy affects the
efcient use of resources (e.g., labor and capital) in a regions
economy (allocative efciency), the level of resources available to
that economy, whether it will affect that regions terms-of-trade
with other regions, and whether that region buys or sells
CO2-certicates. In this paper, equivalent variation (EV) is used
to measure the economic welfare of a representative consumer in
a given region. EV is dened as the amount that the representative consumer would need to be paid to be as well off after the
implementation of emission targets as it would have been if no
climate policy was implemented (based on prices from the
forecast simulation).
In the computation of EV, we do not take into consideration
that climate policy is being implemented to address a negative
(global) externality from CO2-emissions associated with the use
of fossil fuels. Thus, in our computations, the imposition
of a carbon tax will lead to a loss in allocative efciency. However,
if the carbon tax is equal to or less than the marginal social
cost of carbon, then the imposition of the carbon tax will
improve allocative efciency by internalizing the negative externality. Without taking the negative externality into account,
our EV estimates will overstate the welfare losses from the
implementation of the emission targets. According to Stern
(2007) the benets of climate policy are likely to be higher than
the costs.
As shown in Table 7, the EV in 2020 from implementing the
three climate change policies is relatively small for most regions,
with absolute values of less than $10 billion (2004 dollars).
Globally, EV decreases by $98.1$272.7 billion across the three
scenarios or 0.20.5% of projected global GDP in 2020. Hence, our
welfare losses estimates are in the same range, but slightly lower
than those of Dellink et al. (2010). While Annex I countries with
emission targets experience the largest decline in EV, ranging
from $39.5 billion to $159.0 billion, they have the smallest
(footnote continued)
from the Kyoto-period to be banked. The projected growth in GHG-emissions and
GDP between 2005 and 2020 are similar in both models, increasing by 30% and
50% in Dellink et al. (2010), and by 35% and 43% in our model, respectively.
18
A regions terms-of-trade is determined by the prices they receive for its
exports compared to the prices it must pay for its imports. If climate policy implies
that a region must pay more for its imports relative to what it receives for its
exports, then that region experiences a decline in its terms-of-trade and a
reduction in welfare.

Table 7
Equivalent variation in 2020.
Region

Lower Pledges Upper Pledges 30% Annex I

($millions, 2004)

Australia
Japan
Canada
USA
EU27
Switzerland
Norway
Russia
Ukraine
China
South Korea
India
Mexico
Argentina
Brazil
Indonesia
Turkey
Egypt
Rest Annex I
Rest non-Annex I Developed
Rest of Advanced Developing
Rest of Other Developing
Rest of Least Developed

 4928.2
 4023.2
 4441.8
 16,745.2
 743.0
 276.5
 2701.0
 5932.2
388.1
 4078.2
 1103.4
 1307.8
 9611.6
 57.6
 4070.1
 1773.2
1205.2
 341.2
 1677.6
 18,771.5
 7754.4
 6574.3
 2766.4

 8761.4
 7176.5
 7083.4
 24,262.0
 10,015.9
 466.0
 4347.5
 12,316.9
654.5
 12,266.8
 2039.4
 354.4
 15,111.6
 206.3
 6940.7
 2492.0
2133.9
 448.8
 2555.5
 28,582.3
 12,059.9
 8201.2
 4460.5

 13,700.5
 11,665.4
 14,143.2
 68,721.4
 12,048.2
 1544.0
 6440.5
 32,329.0
1197.8
 17,481.4
 272.3
2864.6
 19,467.8
 388.1
 5447.5
 3286.6
3216.5
 601.5
 3702.9
 41,423.0
 17,760.5
 2889.0
 6677.7

Global
Annex I with targets
Non-Annex I with targets
No targets

 98,085.1
 39,514.6
 26,745.4
 31,825.1

 167,360.6
 73,963.6
 44,914.1
 48,482.9

 272,711.6
 159,048.2
 42,693.4
 70,970.0

welfare losses relative to projected GDP in 2020. For the Lower

and Upper Pledges scenario, the losses in EV are 0.1% and 0.2% of
projected 2020 GDP. Non-Annex I countries with emission targets
experience a larger relative welfare loss, ranging from 0.20.4% of
projected GDP in 2020.19 Countries and regions without emission
targets experience the largest relative decrease in welfare, ranging from 0.40.9% of projected GDP. As will be discussed below,
the majority of the welfare losses for this group occur in the major
energy exporting regions.
The loss of allocative efciency in energy markets accounts for
signicant portion of the total reduction in global EV. For the
Lower Pledges scenario, the loss in allocative efciency in energy
markets accounts for 45.5% of the global reduction in EV
(see Table 8). For the Upper Pledges and 30% Annex I scenarios
this share is 40.2% and 35.2%, respectively.20
Annex I regions with the largest decrease in EV across
all policy scenarios are the United States, Russia, Canada and
Australia. For the United States, as shown in Table 8, the welfare
loss is due to a loss of allocative efciency, mainly in energy
markets, and the purchases of emission certicates.21 Even
though the United States enjoys an improvement in its termsof-trade, it is not enough to offset the other welfare losses. Russia,
which is a large oil and gas exporter, experiences a deterioration
in its terms-of-trade, returns to capital and energy endowments
due to relatively lower energy prices in all policy scenarios, and a
loss in allocative efciency. In the pledges scenarios, Russia is a

19
Dellink et al. (2010) also nd for both their pledges scenarios that welfare
losses in non-Annex I countries with targets are somewhat higher than for Annex I
countries. However, they do not provide a decomposition of welfare effects.
20
See Ianchovichina and Walmsley (Forthcoming) or Hanslow (2000).
21
The welfare decomposition for the Upper Pledges and 30% Annex I
scenarios generally have the same relative magnitudes as the Lower Pledges
scenario. A complete welfare decomposition is available from the authors.

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

3705

Table 8
Decomposition of 2020 equivalent variation for the lower pledges scenario.
Region

Allocative efciency
Energy

Terms of trade

Emission trading

Othera

EV

 2911.3
3109.0
 1184.5
2607.2
6981.4
62.0
 1732.8
 3354.3
275.4
13,767.5
2170.0
3776.4
 1197.2
 433.8
 774.0
 1005.4
640.4
 73.1
 827.1
 12,086.0
 5797.4
607.0
 2708.3

 444.6
 3393.4
 1094.5
 8893.3
 4563.7
0.0
 171.6
4272.0
0.0
16,123.7
 1591.9
3628.7
 1271.6
0.0
 1983.9
0.0
0.0
0.0
0.0
0.0
0.0
 669.9
0.0

34.4
 2102.3
 304.3
 522.1
 1959.6
 542.9
 547.4
 3703.9
 26.4
 4825.8
 172.0
224.6
 402.3
155.0
28.1
 600.2
 81.9
 221.6
 276.5
 6380.0
 2216.7
420.9
 371.1

 4928.2
 4023.2
 4441.8
 16,745.2
 743.0
 276.5
 2701.0
 5932.2
388.1
 4078.2
 1103.4
 1307.8
 9611.6
 57.6
 4070.1
 1773.2
1205.2
 341.2
 1677.6
 18,771.5
 7754.4
 6574.3
 2766.4

Non-energy

($millions, 2004)
Australia
Japan
Canada
USA
EU27
Switzerland
Norway
Russia
Ukraine
China
South Korea
India
Mexico
Argentina
Brazil
Indonesia
Turkey
Egypt
Rest Annex I
Rest non-Annex I developed
Rest of advanced developing
Rest of other developing
Rest of least developed
a

 1177.5
 2752.3
 1344.9
 8578.7
 8563.4
107.9
 143.9
 2085.8
21.6
 14,708.0
 1360.4
 6857.2
 3012.3
85.8
 848.4
 26.0
573.3
7.2
 266.3
520.2
240.5
 3531.6
209.0

 429.2
1115.8
 513.6
 1358.3
7362.3
96.5
 105.3
 1060.2
117.5
 14,435.6
 149.1
 2080.3
 3728.2
135.4
 491.9
 141.6
73.4
 53.7
 307.7
 825.7
19.2
 3400.7
104.0

Includes changes in EV due to changes in factor endowments and ownership, and investment.

seller of emission certicates, which helps to partially offset some

of its welfare loss. But in the 30% Annex I scenario Russia must
purchase emissions certicates, leading to a much larger reduction in EV compared with the Pledges scenarios. Australia, which
is a large coal exporter, and Canada, which is an exporter of oil,
also have reductions in their terms-of-trade, a loss of allocative
efciency from the imposition of a carbon tax and must purchase
emission certicates.
The EU27 and Japan have lower decreases in EV, compared
with other Annex I countries with large GHG emissions, due to
gains in allocative efciency in non-energy markets and improvements in their terms-of-trade, mainly due to lower prices of
imported energy commodities. In the Lower Pledges scenario, the
EU27 has one of the lowest welfare losses, at $0.7 billion.
However, in the Upper Pledges scenario, the EU27 has a larger
welfare loss than Australia and Canada due to a larger emissions
reduction target. This causes the purchases of emission certicates to increase from $4.6 billion in the Lower Pledges scenario
to $13.1 billion in the Upper Pledges scenario.
The non-Annex I regions with the largest decrease in EV are
the Rest of non-Annex I Developed Countries (xna1d), Mexico,
Rest of Advanced Developing Countries (xad), and China. The
regions xna1d and xad both contain major energy producing
countries: Saudi Arabia and Iraq in xna1d and Iran and Venezuela
in xad. As shown in Table 8, both of these regions experience a
large deterioration in their terms-of-trade, due to relatively lower
prices for energy commodities in the policy scenarios. Mexico and
China both experience signicant losses in allocative efciency in
both energy and non-energy markets. However, Mexico, which is
a net exporter of oil, also experiences a deterioration in its termsof trade, and must purchase emission certicates to meet its
emission commitments. Conversely, China experiences a gain in
its terms-of-trade, mainly from lower prices of imported energy
commodities, and is a seller of emission certicates.

The welfare implications for India are much different than for
China because the Indian economy is relatively less energyintensive than the Chinese economy. In the Lower Pledges
scenario, the power of the carbon tax (e.g., the ad valorem
equivalent of the carbon tax) for oil, gas and rened petroleum
products in India is only about one-quarter to one-half the power
of the carbon tax on these commodities in China. This leads to a
smaller loss in allocative efciency in India as compared to China.
While India sells fewer emission certicates and has a smaller
improvement in its terms-of-trade compared to China, its overall
welfare loss is approximately one-quarter of Chinas in the Lower
Pledges scenario. For the Upper Pledges and 30% Annex I scenarios, the gains in terms-of-trade and certicate sales more than
offset a larger reduction in allocative efciency. In the 30% Annex I
scenario, India enjoys a $2.9 billion gain in welfare.
Two countries, Turkey and Ukraine, experience a welfare
gain from global emission reduction efforts. As Turkey does not
reduce emissions in any scenario, the reduction in energy prices
leads to a gain in allocative efciency and because Turkey
is a net energy importer also to a gain in its terms-of-trade.
Since the Ukraine does not reduce emissions in either of the
Pledges scenarios, the same explanation applies. In the 30%
Annex I scenario, larger global emission reductions lead to larger
relative decreases in the prices of energy commodities. This
results in a large enough terms-of-trade gain for the Ukraine to
offset losses in allocative efciency and the purchases of emission
certicates.
Because of differences in income levels across the regions, it is
also instructive to consider the change in welfare relative to
projected GDP in 2020. As shown in Fig. 2, the EV from implementing the emission reductions is less than 1.0% of the projected
2020 GDP for most regions across all policy scenarios. The
exceptions are Australia, Canada, Norway, Russia, Ukraine, Mexico
and xna1d. It is interesting to note that while the absolute value

3706

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

2.0
1.0
0.0
-1.0
-2.0
-3.0

Lower Pledges

Upper Pledges

xod

xldc

xad

xa1

xna1d

egy

tur

idn

bra

arg

ind

mex

kor

chn

rus

ukr

nor

che

EU27

usa

jpn

can

aus

-4.0

30% Annex I

Fig. 2. Change in welfare (in % of projected 2020 GDP).

of EV for Norway is less than $6.4 billion, given the size of

Norways economy, the welfare change is relatively large. For the
United States and China, which have relatively large reductions in
EV, these changes are less than 0.4% and 0.5% of projected 2020
GDP for China and the United States, respectively.

5. Conclusions
Several policy implications emerge from the analyses
presented in the previous sections. In particular, the Copenhagen
pledges announced by several Annex I and large non-Annex I
countries are neither ambitious in terms of global CO2-emission
reductions, nor costly in terms of global GDP or welfare losses.
Compared to cost estimates for the Copenhagen pledges, which
are based on partial equilibrium models, the reductions in GDP
calculated with a CGE model in this paper, are generally higher.
Environmental effectiveness is also diminished by surplus AAUs
from Russia, but revenues from selling surplus AAUs cannot
compensate for economic losses. A more ambitious emission
reductions scenario where Annex I countries reduce emission by
30% and major non-Annex I countries reduce emissions 15%
compared to projected emissions by 2020 also results in modest
reductions in average GDP and welfare.
The reductions in GDP and welfare in 2020 are not evenly
distributed across regions. In all policy scenarios, major nonAnnex I countries with emission targets have relatively larger
reductions in GDP compared with Annex I countries. Since these
major non-Annex I countries tend to produce relatively energyintensively, they lose market shares to regions where production
is less energy intensive. Consequently, some Annex I countries
like the EU or Japan experience even small GDP gains, which
increase with tighter CO2-emission targets. Hence, economies
which commit to climate targets earlier and reduce their
CO2-intensities are less vulnerable to tight CO2-emission targets
in later periods. While the GDP losses are larger for major nonAnnex I countries with emission targets, that is not always
the case when considering the change in welfare. For China, the
reduction in EV relative to projected GDP in 2020 is less than the
average global reduction in EV. India experiences relatively small
welfare losses, less than 0.07% of projected GDP in 2020 in the

Pledges scenarios and a welfare gain in the 30% Annex I scenario.

The smaller welfare losses for China and India are due to
improvements in the terms-of-trade, mainly from lower world
prices of fossil fuels, and also from sales of emission certicates.
Thus, while changes in GDP provide insight into the change in
overall economic activity from the implementation of emission
targets, it is not necessarily a good indicator of how emission
targets affect the well-being (or welfare) of individuals in a given
region.
Implementation of the Copenhagen emission pledges would
not result in large amounts of carbon leakage. The leakage rate,
measured relative to emission reductions in countries with
targets, ranges between 10.5% and 13.1% in Pledges scenarios.
The small leakage rates are due to low values for emission
certicates (CO2 tax), which in turn are due to low marginal
abatement costs in China and India. In addition, since the Pledges
scenarios imply targets for a large share of global CO2-emissions
(ca. 80%) the scope for leakage is rather limited.
When interpreting the results, some caveats apply. In particular, quantitative effects on CO2-emissions and costs would
differ from the ndings presented in this report, if other GHGs,
LULUCF and the corresponding mitigation measures and nancial
support from Annex I countries for non-Annex I countries were
also included. These differences would vary across regions,
depending on the signicance of other GHG emission sources in
terms of mitigation potential and costs and the extent to which
they are included in countries emission reduction targets. It
should also be kept in mind that our analysis assumes unlimited
certicate trading across countries with emission targets. While
this implies that tighter targets in some regions translate into
higher CO2-costs in all regions with emission targets, unrestricted
emission trading contributes to achieving climate targets at
lowest global costs. Similarly, the analyses presented do not allow
for offsets generated in non-trading countries. While this option is
expected to also reduce overall mitigation costs, this cost-containment effect vanishes once more countries take on binding
emission targets. Similarly, if banking was allowed, abatement
costs over time could be lower since countries may choose to
reduce more emissions than required in early periods and transfer
unused certicates in future periods. Unless the time path of
targets takes into account cost differences over time (and hence

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

does not require banking or borrowing to achieve the intertemporal optimum), an optimizing strategy would require that
future targets are known to investors well in advance. Finally,
technological change is modeled as being exogenous. That is, the

3707

rate of technological progress is not affected by policies. Allowing

for price-induced technological progress instead, would lower
mitigation costs.

Acknowledgments
Table A1
2020 targets for CO2-emissions compared to projected CO2-emissions.
Region

Lower pledges

Upper pledges

30% Annex I

Absolute emission target [Mt CO2]

All countries
Annex I
Non-Annex I with targets
Non-Annex I without targets

33
11
14
7

259
725
232
301

Compared to projected emissionsa[%]

All countries
 10.0
Annex I
 18.2
Non-Annex I with targets
 7.2
Non-Annex I without targets
0.0
a

31
11
13
7

601
061
238
301

 14.5
 22.8
 13.7
0.0

29
9
13
7

816
481
033
301

 19.3
 33.8
 15.0
0.0

Projected emissions do not include emission reductions for the Kyoto period.

The authors thank two anonymous reviewers for insightful

comments and Katja Schumacher and Jakob Graichen for suggestions on earlier draft versions of the paper. The usual disclaimer
applies. This work was supported by the Federal Environment
Agency (UBA) under the project titled Post2012 climate regime
options for global GHG emission reduction: Analysis and evaluation of regime options and reduction potential for achieving the 21
target with respect to environmental effectiveness, costs and
institutional aspects (FKZ 3708 41 102).

Appendix
See Tables A1 and A2.

Table A2
Overview of Copenhagen Accord and policy scenarios.
Copenhagen Accord (refers to all Kyoto GHGs unless indicated otherwise)

Scenarios (implemented targets for CO2)

Target (in %)

Annex I countries
Australia
 5 up to  15 or  25
Canada
 17
EU27
 20/  30
Japan
 25
Norway
 30/  40
Russia
 15/  25
Switzerlanda
 20/  30
Ukrainea
 20
USA
 17
Rest AIb

Base year

Reduction
below 1990/
BAU (in %)

Lower Pledges

Upper Pledges

30% Annex I

2000
2005
1990
1990
1990
1990
1990
1990
2005

13/1/  11
3
 20/  30
 25
 30/  40
 15/  25
 20/  30

13.0
3.0
 20.0
 25.0
 30.0
 15.0
BAU
BAU
 4.0
BAU

 11.0
3.0
 30.0
 25.0
 40.0
 25.0
BAU
BAU
 4.0
BAU

 24.0
 23.0
 30.0
 24.0
 28.0
 38.0
 27.0
 60.0
 24.0
 49.0

 36.1

 38.9

 15.0

 1.1

 9.3

 15.0

 4.6

 10.5

 15.0

 30.0

 30.0

 15.0

 34.0

 34.0

 15.0

 30.0

 30.0

 15.0

4

Non-Annex I countries
Brazil
It is anticipated that these actions will lead to an expected reduction of 36.1% to 38.9%
of the projected emissions of Brazil by 2020.
China
Lower CO2-emissions per unit of GDP by 4045% by 2020 compared to the 2005,
increase the share of non-fossil fuels in primary energy consumption to around 15% by
2020 and increase forest coverage by 40 million ha and forest stock volume by
1.3 billion m3 by 2020 from the 2005 level.
India
Reduce the emissions intensity of its GDP by 2025% by 2020 in comparison to the
2005 level. The emissions from agriculture sector will not form part of the assessment
of emissions intensity.
Mexico
Mexico aims at reducing its GHG emissions up to 30% with respect to the business as
usual scenario by 2020, provided the provision of adequate nancial and technological
support from Annex I countries as part of a global agreement.
South Africa
South Africa reiterates that it will take nationally appropriate mitigation action to
enable a 34% deviation below the Business As Usual emissions growth trajectory by
2020 and a 42% deviation below the BAU emissions growth trajectory by 2025
South Korea
Reduce national GHG emissions by 30% from the BAU emissions by 2020.

a
When the targets were implemented in the model (early March 2010) emission reduction targets for Switzerland and Ukraine (and also Belarus) were not yet
published at the UNFCCC homepage and hence could not be considered in the analyses.
b
Targets for 30% Annex I were calculated to reach an overall reduction of 30% below 1990 in group of Annex I countries.

3708

E.B. Peterson et al. / Energy Policy 39 (2011) 36973708

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