Where-to-Abate and Where-to-Invest Flexibility: An Integrated Assessment Analysis of Climate Change

Within the framework of a dynamic Computable General Equilibrium model this pa-per analyses the impact of trade restrictions on regional rates of return on capital, mar-ginal costs of abatement and optimal climate policy. It will be shown that regional dif-ferences both in marginal costs of abatement and in the marginal productivity of capi-tal are driven by market imperfection. With restrictions on international trade, the in-dustrialized countries of the North exhibit higher marginal costs of abatement and a lower marginal productivity of capital than the developing nations of the South. Free trade not only in carbon emission rights but also in capital increases conventional wel-fare but stimulates carbon dioxide emissions which are not completely offset by effi-ciency gains in abatement. Nevertheless, depending upon the choice of the discount rate some kind of an invariance result is observed.