Energy Demand and Trade in General Equilibrium

Abstract

This paper sheds light on the impact of alternative environmental policies on energy demand, global 𝐶𝑂2 emissions, trade, and welfare. For this, we develop an Eaton–Kortum type general equilibrium model of international trade which includes an energy sector. We structurally estimate the key parameters of the model and calibrate it to the data on 31 OECD countries and the rest of the world in the year 2000. The model helps assessing the relative welfare effects under alternative environmental policies. We find that, when carbon spillover effects are absent, taxing energy resources as an input in energy production is preferable to taxing domestic energy production in terms of minimizing 𝐶𝑂2 emissions. However, with negative externalities on foreign customers domestic energy output should be taxed to minimize world carbon emissions given a certain level of welfare change for all countries.