Impacts of Trade Friction and Climate Policy on Global Energy Trade Network

Abstract

The trade impacts of the COVID-19 pandemic and the Russian invasion of Ukraine have raised questions about the role of trade and climate policies in energy security and global emissions. This study updates a widely used integrated assessment model (IAM), MESSAGEix-GLOBIOM, to represent complex trade networks to explicitly draw energy flows from their origins to their destination. It then examines the effects of (1) energy trade tariff policies, such as import tariffs, as a proxy to represent an unfriendly trade environment and (2) a global carbon emissions tax on the global energy trade network. Results indicate that trade tariff policies have marginal effects on the trade network, i.e., the size of trade and importing-exporting regions do not change significantly. While high import tariffs significantly reduce emissions due to reduced fossil fuel imports in the importing region, this effect does not translate to significant emission reductions globally, as trade policies only impact downstream of the energy supply chain. However, a carbon emission tax dramatically alters the trade network, by (1) reducing its size by up to 50% and (2) forming trade linkages that allow for a more complex and diverse network of suppliers. This diversity under the emissions tax scenario improves the energy security of major energy-importing regions. Moreover, under an emission tax scenario, a friendly trade environment reduces the energy system costs globally. However, trade friction, such as sanctions or high import tariffs, will increase the energy supply cost significantly, especially for energy-importing regions such as Europe, East and South Asia.