Emission Reduction Commitments and International Carbon Trading: Assessment of Impact on India and China Based on GTAP-E Model

Abstract

The paper investigates how serious will be the impact on India’s economy if India were to make a commitment for substantial reduction in CO2 emissions. Such investigation is done also for China. The analysis is undertaken through counter-factual simulations for the year 2001 by developing scenarios in which India and China cut CO2 emissions by a specified percentage and there exists international trading in carbon. The analysis is undertaken with the help of GTAP-E model. The analysis brings out that the cost of meeting emissions reduction commitments for Annex-I countries can be substantially reduced by engaging in block-level or global carbon trading. The simulation results, obtained under the assumptions that both China and India accept the obligation of cutting CO2 emissions between 5 and 15 percent and there is international carbon trading, indicate that emission cuts in China will reduce welfare both under block carbon trading and global carbon trading. For India, on the other hand, there is an increase in welfare by about 0.2 to 0.3 per cent. Going by the simulation results, China and India would voluntarily cut CO2 emissions if profitable international carbon trading possibilities exist. Therefore, besides negotiating for legally binding commitments for emissions reduction, efforts should be directed at developing international markets for carbon.