Economic Modeling of Contemporary Global Policy Issues: Trade Liberalization and Environmental Policy Warwick J McKibbin ANU Centre for Applied Macroeconomic.

Economic Modeling of Contemporary Global Policy Issues: Trade Liberalization and Environmental Policy Warwick J McKibbin ANU Centre for Applied Macroeconomic Analysis (CAMA) and Lowy Institute for International Policy And The Brookings Institution ANU POGO March 15, 2005

Background papers are available from:
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Overview Part I Thinking about the Uncertain Future
The need for a framework What are models? How to Use them Economy Wide and Global Economic Models Key Features Strengths and Weaknesses A peek inside a new generation of models (dynamic intertemporal general equilibrium models)

Overview Part II Using Dynamic Intertemporal General Equilibrium Models for Scenario Analysis and Policy Design Dynamics of Trade Liberalization Sensible Climate Change Policy

Use of Models in Policy Evaluation
The world is an uncertain place Models are useful for Forecasting Policy evaluation Scenario analysis

Use of Scenarios The most effective way to undertake scenario analysis is with an internally consistent and empirically relevant framework We have developed a series of global economic models with many countries and many sectors based on new developments in intertemporal economics The models form the analytical and empirical basis for designing alternative scenarios

Use of Scenarios Ask the question
What are the likely consequences of the Iraq War? Design the scenarios that give different insights to the question Examine history (Gulf War I, Afghanistan, Vietnam, Korea) Wars always cost more than expected Costs are more than the fiscal outlays Shocks to Government spending for the war (US,Aust,UK) Government spending for the peace (Europe/Japan) Increased global risk Impose the shocks in a consistent framework (a model) Interpret the results Assess the key sensitivities that drive the results Do people expect it to be temporary or more permanent?

Scenario Examples www.economicscenarios.com
The Aftermath of the Sept 11 Terrorist Attacks What if Japan Adopted a Sensible Macroeconomic Policy? The Consequences of WorldCom and Enron Collapses The War with Iraq: the compounding Effects of Oil Prices, Budgetary Costs and Uncertainty The SARS Outbreak: How Bad can It Get? Exploding Fiscal Deficits in the United States: Implication for the World Economy What if China Revalues Its Currency China: The Implications of Policy Tightening Oil Price Scenarios and the Global Economy The United States Current Account Deficit and World Markets

What is an Empirical Economic Model?
A set of equations embodying the history of theoretical and empirical economic knowledge Key bits identities behavioural equations exogenous inputs

How to Use Economic Models
Very carefully! Can get both quantitative estimates and new insights on complex issues

What Features are Important in a Model?
Does the model explain anything we observe today or in the recent past (VALIDATION)? ; Is the model continually reviewed by experts who actually use it; is it published in the refereed academic literature; is a full listing of all equations available on request; and is it generally open to evaluation by others?;

What Features are Important in a Model?
Is the private market willing to purchase the model for the value it provides? ; Do the model results pass the test of common sense?; Are the mechanisms in the model transparent to other trained economists?

Types of Economic Models
Input Output Models Examples: United Nations Global models developed by Wassily Leontieff, Faye Duchin

Input/output models Computable general equilibrium (CGE) models Old style macro-econometric models Modern macro-econometric models Dynamic intertemporal general equilibrium models New Keynesian macro models Micro-simulation models/ artificial life models

Input Output Models Trace the flow of resources between sectors; Little role for relative price changes or substitution of inputs or consumption bundles; Tend to be static; No allowance for capital accumulation or international financial flows; Ignore the role of money and asset prices;

Computable General Equilibrium Models (CGE) Examples: Domestic ORANI model, Monash Model Murphy 303 Multi-Country MEGABARE, GIGABARE, GTEM GTAP World Trade Model Michigan World Trade Model

Computable General Equilibrium Models (CGE) Derived from microeconomic optimization theory; Considerable attention to individual behavior; Relatively easy to understand results given theoretical structure; Inadequate macroeconomic behavior; Tend to be comparative static or recursive dynamic;

Computable General Equilibrium Models (CGE) Inadequate treatment of intertemporal saving and investment decisions, capital accumulation, financial capital flows; Ignore the role of money and asset prices; Rarely validated with actual experience either econometrically or through forecasting or shock replication.

Types of Models Old Style Macroeconometric Models Examples Domestic
NIF Treasury Model Reserve Bank Models I & II International Data Resources Inc (DRI) Warton

Types of Models Old Style Macroeconometric Models
Rely on correlations in time series data based on aggregate economic theory; Reasonably good for short term forecasting (tend to be quarterly) Difficult to understand results because of lack of theoretical structure; Unclear long run properties;

Types of Models Modern Macroeconometric Models Examples Domestic
Murphy model 2 Access Economics Treasury TRYM model International IMF Multimod Oxford Econometric Forecasting (OEF) GEM model of LBS/ NIESR

Types of Models Modern Macroeconometric Models
More tightly specified theory Rational Expectations in some markets short run data consistency with long run theoretical properties tend to be quarterly

Types of Models Dynamic Intertemporal GE Models Examples
The MSG2 Multi-Country Model (McKibbin & Sachs) The GCUBED Multi-Country Model (McKibbin & Wilcoxen) GCUBED Environment GCUBED (Asia Pacific) GCUBED (Agriculture) The MSG3 Multi-Country Model

Types of Models Dynamic Intertemporal GE Models
integrates the key features of the other types of models mix of econometric estimation and calibration annual frequency problem with large degree of dis-aggregation because of complexity of the numerical algorithms needs

Types of Models New Keynesian Models (also called Dynamic Stochastic General Equilibrium models (DSGE)) Since the publication of the Obstfeld and Rogoff textbook on International Economics, macro modellers have discovered intertemporal models Sticky prices Mix of optimizing and rule of thumb agents Imperfect competition

Types of Models Others Micro Simulation Models (NATSEM)
Artificial Life Models (Sante Fe Institute, Brookings Institution)

Inside one class of models
Dynamic Intertemporal General Equilibrium Models

Overall model development strategy
Funding is both through research grants and private consulting Hub and spoke approach to coordinating a global research project The model is managed/developed in the core research team in Australia and Texas Users (researchers/ governments/ financial investors) in different countries feed back to the core group both their own developments of the model as well as funding the core for new developments. All of which which we are able to incorporate into the model over time

Features of DIGE models
Dynamic Intertemporal General Equilibrium Multi-Country Multi-sectoral Econometric Macroeconomic

The MSG2 Multi-country model
McKibbin and Sachs

Development and Subscription Funding
McKibbin Software Group Inc US Congressional Budget Office The Brookings Institution US Department of Commerce US Government United Nations World Bank Australian Treasury Centre for International Economics Nomura Research Institute Daewoo Research Institute (Korea) Warwick Modeling Bureau Many Academic Colleagues

The MSG2 Model Countries United States - Taiwan Japan - Malaysia
Germany Indonesia France Thailand Canada India United Kingdom Philippines Italy Hong Kong Austria Singapore Australia Korea New Zealand China

The MSG2 Model 1 Sector in each country macroeconomic focus
International capital and trade flows Forward looking expectations by some agents Rigidities in physical capital formation but highly mobile financial capital Unemployment is labour markets due to institutional factors

The G-Cubed Model McKibbin & Wilcoxen

Development and Subscription Funding
Major Funding The Brookings Institution United States Environmental Protection Agency United States National Science Foundation McKibbin Software Group Inc Minor Funding through consultancies United Nations Australian Dept of Environment New Zealand Department of Commerce Canadian Dept of Finance

The G-Cubed Model Countries United States Japan Australia New Zealand
Canada Rest of OECD Brazil Rest of Latin America China Eastern Europe and Former Soviet Union Oil Exporting Developing Countries Other non Oil Exporting Developing Countries

The G-Cubed Model Sectors Electric Utilities Gas Utilities
Petroleum Refining Coal Mining Crude Oil and Gas Extraction Other Mining Agriculture, Fishing and Hunting Forestry and Wood Products Durable Manufacturing Non Durable Manufacturing Transportation Services

The G-Cubed (Asia Pacific) Model

Countries United States Japan Australia New Zealand
Rest of the OECD Korea Thailand Indonesia China Malaysia Singapore Taiwan Hong Kong Philippines India Oil Exporting Developing Countries Eastern Europe and the former Soviet Union Other Developing Countries

G-Cubed (Asia Pacific)
Sectors Energy Mining Agriculture Durable Manufacturing Non-Durable Manufacturing Services

The G-Cubed (Agriculture) Model

G-Cubed (Agriculture)
Countries United States Japan Australia EU12 Canada Mexico ROECD China & Hong Kong ASEAN Taiwan Korea ROW

G-Cubed (Agriculture)
Sectors Food grains (rice and wheat) Feed grains Non-grain crops Livestock and its products Processed food Forest and Fishery Mining Energy Textile and Clothing Other non-durable consumer goods Durable consumer goods Services

Agents and Markets AGENTS MARKETS Households Goods & Services
Firms Factors of Production Governments Money Bond Equity Foreign Exchange

Key Features the demand and supply side of the major economies are explicitly modelled ; demand and supply equations are based on a combination of intertemporal optimizing behavior and liquidity constrained behavior;

Households 2 types A) maximize an intertemporal utility function consisting of all goods and services produced domestically and overseas, subject to an intertemporal budget constraint that the present value of consumption is bounded by the present value of after tax income from all sources B)Base aggregate consumption expenditure on an optimal rule of thumb with current consumption of each good allocated so as to maximize contemporaneous utility

Firms 2 types A) Maximise their share market value (the present value of the future stream of dividends) subject to production technology, a cost of adjustment model of capital and taking prices as given. They base their calculation on a summary of the future measured by Tobin’s Q. B)Base aggregate investment expenditure on an optimal rule of thumb with investment equal to cash flow after paying for variable factors of production Apart from physical capital other factors of production are flexible Labor, energy and imported intermediates in MSG2 Labor, energy, materials, resources in GCUBED

Governments Governments provide public goods that enter into the utility functions on households (additively seperable) and transfer payments; In MSG2 governments provide infrastructure that enters into the production function of firms with increasing returns They collect a wide variety of taxes on income of firms households, imports, sales. Governments are subject to the intertemporal budget constraint that the present value of spending and transfers is bounded by the present value of future tax collections.

Countries Countries are collections of individual firms, households and governments that trade goods and services as well as financial assets; Labor is immobile between countries but mobile within countries; Financial capital is mobile within and between countries; Physical capital is sector and country specific at any point in time and subject to adjustment costs over time.

Role of Money Money is required for transactions between all agents. There is a technology that combines money with produced goods and services and the combined product is what is available in the market. The supply of money is determined by the a central bank in each economy in conjunction with assumptions about the exchange rate regime.

Financial Markets Financial markets exist for Money Government Bonds
Equity Foreign Assets Foreign Exchange Each financial asset represents a claim over real resources Money over purchasing power Bonds are claims over future tax collections Equity is a claim over the future dividend stream of a firm Foreign assets are claims over the future exports of the debtor country

Goods and Services Markets
Households, Firms and Governments trade goods and services and price for each is assumed to clear the markets at an annual frequency

Factor Markets Labor Markets Nominal wages are set by different institutional structures in each country; Given the nominal wage and the market prices for goods and services firms higher labor until the real wage in each sector equals the marginal product of labor; Aggregate unemployment can result although over time it is assumed that unemployment tends to force the nominal wage towards the labor market clearing level.

Factor Markets once installed physical capital is costly to move;
Capital produces a flow of services for firms that have installed a capital stock through investment decisions in the past; Investment is subject to rising marginal costs of installation and depreciation over time.

Factor Markets Energy and Materials in GCUBED Firms purchase the output of other sectors as inputs in production; Total demand for the materials and energy sectors is final demand plus demand for intermediate inputs in each sector; In contrast to standard CGE models (which assume Leontieff fixed coefficients between intermediate inputs and value added ) there is a CES production technology which allows substitution of capital, labor energy and materials in production.

Recent Applications Global Demographic Change (Japanese Govt, IMF)
Economics of Infectious Diseases (WHO) Global trade policy (WTO) Macroeconomic imbalances Climate Change Policy

Part II

Trade Liberalization in a Dynamic Setting
by Warwick J. McKibbin

Goals of the Paper Explore the dynamic adjustment to a new WTO Round of Trade Liberalization from 2000 to 2010 Explore how this helps Asia Crisis economies relative to a direct transfer of foreign Aid from OECD economies Explore the impact of incorporating an empirical model of endogenous total factor productivity growth ( Chand (1999))

The Asia Pacific G-Cubed Model
See Dynamic, Intertemporal, General Equilibrium Multi-Country Multi-sectoral Macroeconomic Econometric Keynesian short run with unemployment Mix of rational & rule of thumb behavior

Key dynamic features annual frequency
physical capital is accumulation is endogenous but subject to adjustment costs forward looking agents in goods, factor and financial markets full accounting of stock flow relations combination of intertemporal optimization by agents plus liquidity constraints sticky nominal wages

Some Important Issues Trade, capital flows and adjustments in domestic financial markets are central to global adjustment to shocks; Agents arbitrage between different assets within countries and across countries - taking into account the adjustment costs of changing the physical capital stock in each sector.

What are Financial Assets?
Each financial asset represents a claim over real resources Money over purchasing power Bonds are claims over future tax collections Equity is a claim over the future dividend stream of a firm Foreign assets are a claim over the future exports of the debtor country Asset values embody expectations of future real activities

The Simulations

A New Millenium Round In 2000, it is announced that existing tariffs will be reduced by 1/3 from 2000 to 2010 in most countries Tariffs on goods trade are based on the GTAP4 database (see Table 3a) For services it is assumed there is a cost reduction based on work by Centre for International Economics (see Table 3b)

Summary Largest gains to countries liberalizing most
short run losses outweighed by long run gains trade impacts /exchange rate adjustments tend to be the opposite in the short run relative to the medium run (role of intertemporal budget constraints)

Direct Aid to Asia Crisis Countries

Aid Simulation Indonesia, Korea, Thailand and Philippines receive a direct transfer from the OECD economies such that: The transfer declines by 10% per year after 2000 Receiving countries are no worse off in terms of the present value of consumption than under the trade liberalization simulation. Donor countries donate in proportion to their share of GDP in the donor total

Summary Income transfer causes adjustment through the balance of payments consumption of receiving countries rise consumption of donating countries fall trade liberalization is a better way to help crisis economies

Total factor productivity growth in manufacturing endogenous to the change in tariffs (following the econometric results of Satish Chand (1999)

Summary Making TFP growth endogenous to changes in tariff rates increases the gains from liberalization But also accentuates the adjustment process through the balance of payments in the short run

Conclusion Dynamics in the sense used in this paper adds a richer story to trade liberalization In particular there are many problems - noticeable to policy makers in the real world - which need to be understood Many short term results (over a decade) are the opposite of the long term neoclassical results that come from conventional CGE models.

Sensible Climate Policy
See “Uncertainty and Climate Change: The Challenge for Policy” Zillman, McKibbin and Kellow

The Brookings Institution
Based on the book: McKibbin W.J and P.J. Wilcoxen (2002) Climate Change Policy after Kyoto: A Blueprint for a Realistic Approach The Brookings Institution

Overview What is the climate change policy issue?
Managing Uncertainty in a sustainable way Features of a Sustainable System What Has Been Done so far? The UN Framework Convention on Climate Change The Kyoto Protocol Fatal Problems with the Kyoto Protocol? An Alternative Approach: The McKibbin Wilcoxen Blueprint? Where to go from here?

We need to distinguish between two separate questions:
Should the world take action against the threat of climate change? Should the world implement the Kyoto Protocol?

What is Climate policy about ?
We know that carbon concentrations in the atmosphere have risen 30% since the industrial revolution. We know the science of the greenhouse effect. Uncertainty is everywhere : Uncertainty about link between carbon dioxide emissions and the timing and magnitude of climate change Uncertainty about costs and benefits of climate change Uncertainty about costs and benefits of abatement Uncertainty about the policy responses

Some Illustrations of the uncertainties

What should be done given uncertainty?
Some proposals: Do nothing Problem may be small, avoiding it may be expensive (what if the problem is large and avoiding it is cheap?) Do something drastic Problem may be enormous, avoiding it may be cheap (what if the problem is small and avoiding it is expensive?) A prudent policy would avoid extremes Reduce emissions where possible at low cost

Features of a Sustainable System
Extensive - all major carbon emitters need to participate Implementable in key countries Equitable - across a range of dimensions Efficient - minimum economic cost Flexible - need to adjust as new information is revealed Low cost of implementation/administration Must establish clear property rights over a long period of time to provide the right incentives for all involved households, industry, governments Should be in all participants interest to commit current and future participants within each country involved

What has been Done so far?

The UN Framework Convention on Climate Change
Negotiated at the Earth Summit in 1992 in Rio Set Goals (not targets) “preventing dangerous anthropogenic interference with the Earth’s climate system” Annex I countries (industrial countries) were to adopt policies to “aim” to reduce their emissions Entered into force in March 1994 Set in process a series of meetings of the “Conference of the Parties” (COP)

The Kyoto Protocol Protocol to the 1992 UN framework Convention on Climate Change, negotiated at COP3 in 1997 Annex 1 countries agreed to reduce emissions of 6 greenhouse gases to 5.2% below 1990 levels on average between 2008 and 2012 No commitments for Developing Countries (countries such as China ratify but have no targets!) Some flexibility allowed through permit trading clean development mechanism (CDM) joint implementation

The Kyoto Protocol legally binding if 55 countries accounting for 55% of developed country emissions ratify USA and Australia have rejected Massive dilution of the original targets to encourage countries such as Japan, Canada, NZ and Russia to ratify Russia is the key country that will determine if the Protocol enters into force – Russia has put the ratification legislation to the Duma

Kyoto-style Permit Trading
Emission permits are issued equal to the Annex 1 target Each country receives an allocation of permits Countries/firms buy permits if they wish to increase emissions sell permits if they wish to reduce emissions Trading allows original country targets to be tightened or relaxed depending on the costs Abatement differs across countries depending on costs of abatement relative to the price of permits The permit price will be determined by demand and supply and will equal the cost of preventing the emission of an additional unit of carbon

Advantages of Kyoto trading
Global target is met but differential country response allowed through the market Cost of removing an additional unit of carbon is equal everywhere (efficient) Compensation (across countries and within countries) can be built into the initial permit allocation

Problems With Kyoto Approach
A fundamental problem with targets and timetables What is the correct target for each country and the world? What is the optimal period? targets impose unknown cost for given outcome for emissions permit trading gives greater flexibility across countries but no flexibility in total

If costs are low we miss the opportunity to cut emissions quickly (in total) because we have a fixed target If costs are high we might create severe problems that would destroy the commitment to Kyoto

Permit trading more widely implemented could cause economic and political problems with large wealth transfers between economies and large fluctuations in trade balances and real exchange rate Some historical examples Dutch Disease – e.g. North Sea Oil Discovery in 1970s Keynes classic “transfer problem” related to German Reparations after WWI

If one large country reneges the permit system would likely collapse since the price depends on all countries supply and demand This requires a very strong monitoring and enforcement mechanism in all participating countries. If developing countries participate in permit trading the price of carbon would be the same as in industrial countries – why would they want this structural shock even with payments for permits?

Alternatives to permit trading?
Carbon taxes Subsidies to technologies Mandatory targets for renewables

A carbon tax: A fixed price for carbon with revenue going to the government Emission outcome is unknown but the cost of carbon is known with certainty Problems Tax payments are enormous If optimal reduction is 20% of emissions, firms must pay tax on 80% of original output. Very unpopular with industry and politicians!

Subsidies for the Best Technology ?
Clean Coal? Renewables? Problem is that the solution will be technological but are governments the best placed to pick the winners? The subsidies will likely go to those with the greatest lobbying power

Mandatory Targets for renewable energy
Evidence is that this is a high cost approach Targets and timetables approach yet again

Other options? Reform coal markets (see Anderson and McKibbin (1998)
Address direct problem such as black carbon in developing countries

Black Carbon Important issue particularly in developing countries
Significant short run climate impacts Significant health impacts Significant negative impacts on agriculture productivity Major issue in China

Features Released when carbonaceous fuels incompletely combust
Hard to measure China is 17% of global emissions Mostly emitted by burning of raw coal, coal briquettes and bio-fuels in the residential sector

Source: Table 2 page 7 of Streets (2004)

Are there any other alternatives?
Need a policy with best features of permits, taxes and subsidies Like a tax: Should guarantee that costs won’t be excessive Like permits: Should avoid huge transfers to the government Like subsidies: it should encourage the search for technological solutions Importantly it should make property rights clear over a long period and provide incentives for industry,households and governments to reduce emissions at low cost

The Blueprint (a hybrid policy)
Each participating country would: Require that producers of energy within their borders have an annual emission permit for each ton of carbon embodied in their energy produced and sold domestically or imported Issue perpetual emissions permits equal to a specified fraction of a base period emissions. Be allowed to sell additional annual permits to firms within its borders at a stipulated price ($P per ton of carbon), where $P could be $US10 per ton of Carbon ($US2.72 per ton of CO2). Create domestic markets in the perpetual and annual permits

Looking at the policy in more detail:
Allows one unit of emission per year for a long period Distributed once at enactment Can be leased or sold within a country Quantity can set by treaty: QT Price will be set by the market Perpetual Permit Annual Permit Allows one unit for one year Sold by government as demanded Price set by treaty: PT

Supply of each type of permit (for use in a given year)
Perpetual permits for lease SL $ QP QT SS QP Annual permits for sale $ PT

Overall supply of permits (for use in a given year)
$ PT S QT QP

If abatement is easy: MAC rise slowly Low D for permits
P below threshold No annual permits Hit target QT $ PT S P D Revenue to permit owners QT Q Permits

If abatement is difficult:
MAC rises rapidly High D for permits P at threshold PT Annual permits used Emissions exceed QT $ Revenue to government P, PT S Revenue to permit owners D QA QT Q Permits

Key Points Each system is run within a country using that country’s own imperfect monitoring and enforcement mechanisms and its own legal and accounting systems No international trade in the assets only domestic markets Short run efficiency guaranteed by a common price Long run efficiency driven by structural change Incentives for all actors are internalized within countries

Developing Countries ... Negotiate a perpetual permit allocation that is larger than current emissions Price of annual emission permits zero in the short run because more permits than needed Price of perpetual emission permits will be non zero giving important signals for investment projects Over time the permit price in countries will equalize as developing countries “ability to pay rises”

“ Climate Change Policy For India”
Example from “ Climate Change Policy For India”

Developing Countries ... Will developing countries ever agree?
Depends on who is expected to get the valuable assets called permits Will they ever agree to Kyoto style interventions?

Advantages of the Blueprint policy
Guarantees that compliance costs would not be too high Passes the test that Kyoto fails Can be justified on cost-benefit grounds Current knowledge about climate risks justifies slowing emissions at low cost

Advantages of the Blueprint policy
Avoids huge transfers to the government Each government can decide how to hand out perpetual permits but once these property rights are distributed they are not revisited (like land contracts) Permits act as transition relief for industries (and affected workers) and will reduce opposition Also, easy for industry to understand -- like grandfathering Reduces emissions wherever cost-effective Prudent: eliminates emissions where possible below a fixed price

More advantages ... Maintains national sovereignty
Important for US and developing country participation Incorporates an explicit mechanism for developing country commitments with no short term costs but clear incentives for future investment in less carbon intensive activities Provides a futures market (perpetual permit market) Allows individual risk management

More advantages ... No direct international transfers of wealth
Trading is national, rather than international Less disruptive to exchange rates and foreign aid budgets Gives incentives for early action Perpetual permits could be distributed now, even without a treaty! The private sector is already doing this but property rights unclear

More advantages ... Built-in incentives to monitor and enforce
Annual permits generate government revenue Owners of perpetual permits do not want permit prices to erode Credible Less draconian so more likely to be enforced into the future

Still more advantages ... Relatively easy to modify as information arrives Can raise or lower the world price as risks become better known Easy to add countries over time Does not require re-negotiation of treaty New countries don’t hurt existing permit owners Creates a future market in carbon (the perpetual permit market) Gives a long term price signal but with a fixed short term cost

An Illustration of how Uncertainty impacts on the costs of Kyoto versus Blueprint
Suppose Russia grows at 1% per year faster from 2000 to 2012 than our baseline forecast (4.4% rather than 3.3%) What is the cost of Kyoto versus the Blueprint under the baseline scenario versus the alternative scenario of higher Russian growth? Both Kyoto and the Blueprint assume non participation by developing countries even though the Blueprint has a clear mechanism for getting developing country participation!

The G-Cubed Model Countries United States Japan Australia New Zealand
Canada Europe Rest of OECD Brazil Rest of Latin America China India Eastern Europe and Former Soviet Union Oil Exporting Developing Countries Other non Oil Exporting Developing Countries

The G-Cubed Model Sectors Electric Utilities Gas Utilities
Petroleum Refining Coal Mining Crude Oil and Gas Extraction Other Mining Agriculture, Fishing and Hunting Forestry and Wood Products Durable Manufacturing Non Durable Manufacturing Transportation Services

BAU Russian growth High Russian growth

Change in GNP:

Where to go from here? The current approach as embodied in the Kyoto protocol does not deal with uncertainty and is not sustainable The Blueprint dominates in terms of the extent of emissions reductions; risk management; sustainability. The Blueprint can be implemented within countries and is consistent with moving towards Kyoto if a country ever wanted to. Just have the government pull out of the annual permit market and allow these asset to be traded internationally

www.sensiblepolicy.com www.notwrong.com
Background Papers

Economic Modeling of Contemporary Global Policy Issues: Trade Liberalization and Environmental Policy Warwick J McKibbin ANU Centre for Applied Macroeconomic.

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Economic Modeling of Contemporary Global Policy Issues: Trade Liberalization and Environmental Policy Warwick J McKibbin ANU Centre for Applied Macroeconomic.

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