Emissions Trading, Capital Flows and the Kyoto Protocol

February 1, 1999


We use an econometrically estimated multi-region, multi-sector general equilibrium
model of the world economy to examine the effects of the tradable emissions permit
system proposed in the 1997 Kyoto protocol, under various assumptions about that
extent of international permit trading. We focus, in particular, on the effects of the
system on international trade and capital flows. Our results suggest that
consideration of these flows significantly affects estimates of the domestic effects of
the emissions mitigation policy, compared with analyses that ignore international
capital flows.