Climate change and reduction of CO2 emissions: the role of developing countries in carbon trade markets

The Kyoto Protocol provides a framework for the reduction of greenhouse gas emissions from industrialized nations. These reduction targets will have economic impacts that will affect not only those industrialized countries but also other developing countries around the world. In this context, the following document analyzes the economic implications of the reduction of carbon emissions from industrialized countries (Annex I countries under the Kyoto Protocol) and the participation of developing countries, including those in Latin America, under different carbon trading scenarios. The document utilizes the GTAP-E general equilibrium model, which accounts for capitalenergy substitution and carbon emissions associated with intra-industrial consumption, to analyze the economic and welfare impacts of carbon emissions trading. The results show that the participation of developing countries such as China and India lowers the costs of emissions trading for Annex I and non-Annex I countries. For Latin America, the impacts vary depending on whether a country is energy exporting (negative) or energy importing (positive) and whether the United States reduces emissions. For energy exporting countries, the impacts on welfare are negative mostly due to a deterioration of the terms of trade from crude oil, gas and petroleum products, brought about by a decreased demand from the Unites States and other Annex I countries.