Including Non-CO2 Emissions in the European ETS

Abstract

Although CO2 emissions stand for most of greenhouse gas (GHG) emissions, the contribution of mitigation efforts based on non-CO2 emissions is still a field that needs to be explored more thoroughly. Extending abatement opportunities to non-CO2 could reduce overall mitigation cost but it could also exert a negative pressure on agricultural output. This article offers insights about the first effect while provides a preliminary discussion for the second. We investigate the role of non-CO2 GHGs in climate change mitigation in Europe using a computable general equilibrium (CGE) model. We develop a specific modelling framework extending a CGE model with non-CO2 GHGs as an additional mitigation alternative. To model and evaluate the general equilib- rium responses to mitigation policies, we tied emissions to explicit endowment, input and output flows. These modifications allow us to analyze the implications in terms of costs for the European Union (EU) of including non-CO2 GHG emissions in its cap and trade system. We distinguish two targets on all GHG emissions for 2020, a reduction by 20% and 30% with respect to 1990 levels. Within the same reduction cap (either -20% or -30%), we distinguish two mitigation opportunities by means of a carbon tax: on CO2 only and on all GHGs (both CO2 and non-CO2 GHG emissions). Results show that a multi-gas mitigation policy will slightly decrease policy costs compared to the CO2 only alternative.

Keywords: CGE, Greenhouse gas emissions, Cap-and-trade system, Agriculture, Non-CO2 emissions, European Union, Effort Sharing Decision

JEL Classification: Q5, Q58