Emissions trading between Russia and the European Union: a CGE analysis of potentials and impacts

A computable general equilibrium analysis of emissions trading between Russia and the European Union (EU) is presented using a complete and consistent input-output database for the Russian Federation and several baseline scenarios for Russia’s future economic development. We find that emissions trading, besides being beneficial for the EU countries, implies a significant rise in Russia’s GDP and welfare, along with a considerable drop in Russia’s output. Emissions trading thus implies a substitution of rents for produced income. The decline in Russia’s output mainly concerns the energy-producing and energy-intensive industries. As investment goods, consumption goods, and service sectors benefit, this can be seen as a modernization of the Russian economy. The favorable effects for the EU of emissions trading with Russia are larger under a “pessimistic” business-as-usual development of the Russian economy and are smaller under an “optimistic” development. Copyright Springer Japan 2008