Reducing coal subsidies and trade barriers: their contribution to greenhouse gas abatement

Abstract

International negotiations for an agreement to reduce the emission of greenhouse gases have not produced cost-effective policies for reducing emissions, not least because they are unlikely to prevent ‘leakage’ through a re-location of carbon-intensive activities to poorer countries. An alternative or supplementary approach that is more likely to achieve at least some emission reductions, and at the same time generate national and global economic benefits rather than costs, involves lowering coal subsidies and trade barriers. Past coal policies have encouraged excessive production of coal in a number of industrial countries and excessive coal consumption in numerous developing and transition economies. This paper documents those distortions and outlines the circumstances under which their reform (currently under way in some countries) could both improve the economy and lower greenhouse gas emissions globally. It then quantifies the effects on economic activity as well as global carbon emissions, using the G-Cubed multi-country general equilibrium model of the world economy. Both the gains in economic efficiency and the reductions in carbon dioxide emissions that could result from such reforms are found to be substantial—a ‘no regrets’ outcome or win–win Pareto improvement for the economy and the environment.