Banking and Trade of Carbon Emission Rights: A CGE Analysis

This paper analyses trading and banking of carbon emission rights. Within the framework of a modestly simple, integrated assessment model that brakes the world economy in just two regions, North and South, it can be shown: (1) There exists separability between environmental targets and the choice of instruments. Increasing the "when and where" flexibility in greenhouse gas abatement either through banking or trading of carbon emission permits or both positively affects global welfare. It has, however, almost no impact on global climate change. (2) Depending upon the choice of instruments there are significant distributional effects across regions. Both regions can improve welfare simultaneously, if carbon emission rights are traded on open international markets. But if it were feasible to bank or borrow carbon permits, then independent of whether there is trading of carbon rights or not the South suffers welfare losses compared to a no banking no trade situation.