Emissions trading in the development model of Colombia

This work analyses the economic implications of introducing an Emissions Trading System (ETS) in Colombia for compliance with emission reduction agreements. For this purpose, an emissions trading module was designed and incorporated into the general equilibrium model MEG4C. From this analysis, it was possible to identify two effects of an ETS: (i) the regulated sectors incorporate the marginal cost of emissions into production, which brings about a reduction in production, and (ii) the sectors substitute emission intensive goods, seeking to minimize the costs associated with the value of the emission permit, which leads to a reduction in emissions due to a change in intensity. Finally, it is observed that when the funds from the sale of permits are used to promote capital demand (to encourage investment), abatements are achieved at a lower cost to GDP, given that these resources contribute to economic transformation, sustainable development and the generation of other co-benefits. Key policy insights An emissions trading system in Colombia would allow mitigation targets under its nationally determined contribution (NDC) to be achieved cost-effectively. Modelling suggests the implementation of a full sector ETS would result in a reduction in the annual GDP growth rate of 0.8 percentage points, on average, versus the business as usual scenario. The option of recycling the revenues of the ETS into capital support, leads to long-term substitution for less emission intensive energy sources, negatively impacting production in the oil, coal and livestock sectors. The demand for capital increases in capital intensive sectors, even more so if they are low-emission sectors, while it decreases in all others.