Energy 159 (2018) 621e629

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Energy
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Effects on the U.S. economy of its proposed withdrawal from the Paris
Agreement: A quantitative assessment*
Duy Nong a, *, Mahinda Siriwardana b
a
Department of Agricultural and Resource Economics, Colorado State University Fort Collins, Colorado 80526, United States
b
UNE Business School, University of New England Armidale, NSW 2350, Australia

a r t i c l e i n f o a b s t r a c t

Article history: This paper assesses the potential effects on the U.S. economy if the U.S. retreats from its pledge to reduce
Received 3 November 2017 greenhouse gas emissions agreed under the Paris Agreement. We assume prior to withdrawal that the
Received in revised form U.S. and other nations or regions would introduce climate change policies, such as emissions trading
23 May 2018
schemes, to meet their emission targets which were agreed in Paris. When the U.S. withdraws from the
Accepted 25 June 2018
Available online 28 June 2018
Paris Agreement, it will not adopt such a policy. We use a modified version of the GTAP-E model to
examine the effects on the U.S. economy of its anti-mitigation action in a counterfactual framework. The
findings suggest that a retreat from the Paris Agreement would increase the real GDP and real private
JEL classification codes:
D58
consumption by 1.13% and 0.78%, respectively, in the U.S. Given such improvements at the macro level,
D60 the effects on the U.S. energy sectors from the withdrawal are substantial. Prices of energy would reduce
Q43 considerably, particularly for coal, natural gas, and consequently the price of electricity (
17.8%). These
Q58 three energy sectors would also experience considerable expansions when the U.S. withdraws from the
Paris Agreement compared to its position if it honored its previously pledged committed targets.
Keywords:
© 2018 Elsevier Ltd. All rights reserved.
Paris agreement
Energy sectors
GTAP-E
U.S. economy
Emissions trading schemes

1. Introduction
This paper assesses the potential effects on the United States
(U.S.) economy if the U.S. retreats from its pledge to reduce
greenhouse gas emissions agreed under the Paris Agreement. The
withdrawal is likely to happen in view of the statement by the
President of the United States, Donald Trump, on June 1, 2017.1
President Trump declared that the Paris accord would weaken
the U.S. economy and its long-term prosperity.2 The President
*
The authors would like to acknowledge funding from the Australian Research
Council under ARC Linkage Project LP120200192. The authors are also grateful to
three anonymous reviewers for their comments to improve the quality of this
article.
* Corresponding author.
E-mail addresses: duy.nong@colostate.edu (D. Nong), asiriwar@une.edu.au
(M. Siriwardana).
1 participate in such an aggressive international climate change
See https://www.nytimes.com/2017/06/01/climate/trump-paris-climate-
agreement.html?mcubz¼0.
2
See http://www.foxnews.com/politics/2017/06/01/trump-u-s-to-withdraw-
from-paris-climate-pact-calls-it-unfair-for-america.html.
further indicated that the withdrawal would maintain the eco-
nomic growth of the country without disruptions. Despite this most
alarming threat by the U.S. to the global climate policy, no proper
economic appraisal has been undertaken to date to examine the
difference between with and without the retreat. This paper aims to
fill this vacuum. We use a well-known global economic model,
namely the Global Trade Analysis Project e Environment (GTAP-E)
model, to undertake a counterfactual scenario analysis of the U.S.
economy with and without the retreat, particularly focusing on the
energy sectors.
It is recalled that the 2015 Paris Climate Change Conference was
a successful meeting that reached an effective international coop-
eration to reduce greenhouse gas emissions and for tackling climate
change. At the meeting, the highest polluters, China and the U.S.
agreed to lower their emission levels according to the proposals
submitted to the United Nations. This was a remarkable progress
since these two countries had previously been unwilling to
program. Their participation and emission abatement targets have
been extremely important to limit the increase of global

https://doi.org/10.1016/j.energy.2018.06.178
0360-5442/© 2018 Elsevier Ltd. All rights reserved.
622 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629
temperature below 2 Celsius because these two countries account
for more than 35% of total global emissions [1]. If they continue
their usual emission levels, emission reduction efforts by all other
nations will probably be ineffective towards controlling global
warming. The success of the Conference was then reached on April
22, 2016 since it was ratified by 197 Parties to the Paris Agreement
that was carried out at the United Nations Headquarters in New
York, United States.3 The Agreement finally entered into effect on
November 4, 2016.
This good news was however short lived. The President of the
United States, Donald Trump, tweeted on May 31, 2017 that the U.S.
would pull out of the 2015 Paris Agreement on climate change
mitigation. As a consequence, on August 4, 2017, the Trump
administration informed the United Nations that if there was no
better agreement that makes it ‘fair’ for the U.S., the country would
withdraw from the Paris Agreement as soon as it is practicable to do
so.4 The earliest date for the U.S. to leave the Agreement, however,
would take effect in November 2020 only because the United Na-
tions Framework Convention on Climate Change (UNFCCC) allows a
Party to withdraw from the Paris Agreement after three years since
the Agreement came into effect on November 4, 2016. It also takes
one more year of notice to the UNFCCC to undertake an official
withdrawal.5 Despite these requirements, the U.S. need not
necessarily follow the itinerary to reduce its emission levels
because there is no compelling condition in the Agreement that
binds a Party to meet its abatement target.
The withdrawal of the U.S. would render the global objective of
limiting an increase in global temperature below 2 Celsius more
difficult to achieve or even unachievable.6 Also, the action may send
negative signals to other countries participating in the Paris
Agreement and erode wide international cooperation on climate
change mitigation because other countries would foresee that they
would lose their competitiveness against the U.S. Hence these
countries neither would organize appropriate legislations to reduce
their committed abatements nor participate in the program in the
long run. An in-depth analysis of these issues is beyond the
objective of this paper. Instead, we assess the economic impacts of
the proposed action by the President of the U.S. The U.S. economy is
likely to be better off if it is not constrained by the emission
reduction proposal. If the U.S. honors its commitment to reduce the
national emission levels in order to meet the target of a 26e28%
reduction from the 2005 level, it must have a national mechanism
to achieve this objective. This mechanism may take a form such as
an emission trading scheme (ETS) or a carbon tax, or a set of climate
change and energy taxes unless the country is supported by
advanced technologies to considerably cut emission levels.
For the U.S., to pursue technological advancement to reduce
emissions in the short to medium term would be an expensive
option since it may require a considerable restructuring in the
economy to move to a low carbon or renewable energy oriented
economy. The U.S. still relies heavily on fossil fuels to generate
energy (i.e. about 80% of energy production comes from natural gas,
petroleum, and coal [2]. As a result, a market driven mechanisms
such as an ETS or a carbon tax may have to be introduced to the U.S.
economy to help the country to achieve the target. Such a policy is a
3
See http://unfccc.int/paris_agreement/items/9444.php. Several Parities signed
the Agreement in a few months later.
4
See https://www.buzzfeed.com/zahrahirji/us-continues-to-send-mixed-
messages-about-the-paris-climate?utm_term¼.ocdRwNrLVW#.itG1KJb5a2.
5
See https://www.washingtonpost.com/news/energy-environment/wp/2017/06/
05/withdrawing-from-the-paris-deal-takes-four-years-our-next-president-could-
join-again-in-30-days/?utm_term¼.ff21b19f325e.
6
See https://www.cbsnews.com/news/what-happens-if-the-u-s-withdraws-
from-the-paris-climate-change-agreement/.
cost to the economy because sectors need to pay for their emis-
sions. The costs imposed pay for such policies in the economy and
may depend on emission targets or total permit allocation and the
country’s marginal abatement costs (MACs) [3]. The effects on the
U.S. energy industries would be considerable under a mechanism
such as an ETS or a carbon tax because they are emission-intensive
industries that emit large volumes of greenhouse gases into the
atmosphere.
In this paper, we use an extended version of the GTAP-E model
to access the impacts of the U.S. retreat from the Paris Agreement
on its economy, particularly on the energy sector. We assume that
all other signatories to the accord would reduce their emission
levels according to the proposals submitted to the United Nations
by introducing ETSs to achieve their targets. We prefer ETSs to
carbon taxes for these countries because ETSs have been intro-
duced in many countries and regions, such as Europe, New Zealand,
and South Korea. An ETS ensures a specific emission level to be
achieved in a country by setting the quantity of emission permits
allocated to its industrial sector. Under the mechanism of a carbon
tax, the emission levels are unknown, since it only imposes a price
on such emissions and allows the market to decide on the emission
level according to the country’s MAC. We select seven regions for
our analysis. Six of the regions are: China, the U.S., European Union
(28 members), India, Brazil, and Russia. These are the major pol-
luters and each of them accounts for more than 5% of the world’s
emissions [1]. All other regions are added together to form seventh
region e the rest of the world. We propose two scenarios in our
investigation: (1) all regions introduce ETSs to meet their own
emission targets, and (2) all regions, excluding the U.S., introduce
ETSs to meet their targets. We consequently analyze the impacts on
the U.S. economy by comparing the results in these two scenarios.
The rest of the paper is organized as follows. Section 2 reviews
previous studies on the impact of an ETS on various economies and
energy sectors. Section 3 provides an overview of the model and
data used. Section 4 reports the simulation results and analysis,
while Section 5 concludes the paper.
2. Literature review
Several countries and regions such as the European Union,
Switzerland, New Zealand, and South Korea have introduced ETSs
to enable them to reduce their emissions. This market-based in-
strument is a preferred approach because polluters can equalize
their MACs by exchanging emission permits among polluters in a
domestic or an international market if schemes are linked. This
mechanism, therefore, allows participants or countries to achieve
the least cost in meeting their abatement obligations [3,4,7,19]. The
computable general equilibrium (CGE) modeling approach is the
preferred method to assess the effects of an ETS because detailed
impacts of the policy at national, international, and sectoral levels
can be addressed by using this approach [8,9].
When a country introduces an ETS, it raises the costs of eco-
nomic activity in its economy because emitters have to pay for the
emissions they generate. If that country is able to switch to use low
emission-intensive energy inputs (e.g., natural gas or renewable
energy) instead of coal or oil, it will reduce the cost of emissions or
the permit prices. In addition, sources of emissions can consider-
ably affect the MAC of a country, subsequently increasing the cost
burden on that economy [3]. As a result, each country would
experience a different level of cost due to an ETS which may result
in a contraction of its economy. The effects on various industrial
sectors also differ. Many energy sectors may be unfavorably affected
under an ETS because these sectors mainly use fossil fuels to
generate energy. The mining and extraction sectors release large
volumes of fugitive emissions during their extraction and
 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629
transportation activities. Some clean energy sectors such as
renewable energy production may be expanded because the cost of
their emissions is relatively small and the country may seek to
substitute renewable energy for emission-intensive fossil inputs.
Fischer and Fox [10] showed that an ETS particularly reduces output
levels of electricity generation, petroleum and coal products
manufacturing, coal mining, natural gas extraction, and crude oil
extraction sectors. Tang et al. [11] found that an ETS would intro-
duce only a small cost to the Chinese economy but would assist
substantially to develop renewable energy sectors in China. Choi
et al. [12] concluded that an ETS in South Korea would reduce real
GDP by 0.41% and the fossil fuel energy sectors would be slightly
contracted. In another study that assesses the effects of an ETS on
foreign companies or industries, Malina et al. [13] suggested that
the European Union’s ETS only produces small unfavorable effects
on the U.S. airline companies. These overseas carriers could even
make additional profits when traveling to the European areas if
they can pass on all of the cost to customers.
In Australia, although an ETS was not successfully introduced,
many studies informed the federal government that an ETS was not
a costly instrument to help Australia achieve its required abate-
ments. Adams [14] concluded that an ETS would only increase the
cost of the country’s national income by 1.3% and the real GDP by
1.2% in 2030, while Adams et al. [15] further indicated that an ETS
would reduce Australian real GDP by 1.1% relative to the baseline in
2030. Nong et al. [16] suggested that the Australian real GDP would
be reduced by 1.6% in 2030 under an ETS, but the country would
experience a strong transition to a low carbon economy, as shown
by a considerable growth in the renewable energy sectors such as
the hydro, wind, solar, biomass, and biogas electricity generation.
These renewables would grow at the expense of the fossil fuels
mining, extraction, and electricity generation sectors. The Austra-
lian Treasury modeling found that an ETS in Australia would
impose only a small cost on the economy [5,6]. Accordingly, real
GDP would reduce by 1.1% in 2030, while household incomes
would still increase slightly. Their findings suggested that an ETS
would particularly help the country to move to a low carbon
economy with a substantial growth in the renewable electricity
generation sectors.
The literature generally favors the proposition that an ETS
would contract the economy depending on its own emission target
and MACs. Also, the energy sectors are considerably affected.
Renewable energy sectors would gain from the policy in contrast to
the losses incurred by emission-intensive energy sectors. In this
study, we show that the U.S. economy will not contract if they do
not impose a climate policy (i.e., an ETS) to help the country meet
the emission target agreed at the Paris Conference. The emission-
intensive energy sectors would also not reduce their output
levels, as they would otherwise experience under an ETS. The
analysis therefore quantitatively demonstrates the position of the
U.S. economy with and without the retreat. Whether the U.S. wants
to take this path at the expense of the environment is a political
decision that needs further consideration.
3. Modeling and simulation design
3.1. Model and data
We used the extended version of the Global Trade Analysis
Project e Environment (GTAP-E) model [17] in this study. This
extended version allowed us to estimate implicitly the effects of an
ETS imposed only on industrial sectors. In a typical GTAP-E simu-
lation of an ETS, for example, each industry is forced to reduce their
emission levels by 10% relative to their baseline levels if the country
target is set to achieve a 10% emission reduction. Consequently,
623
emission permits are allocated to each industry equivalent to 90% of
their initial emission levels under the scenario of an ETS. These
permit allocations can be through an auction or transferred freely
to each industry (‘a grandfathering mechanism’), or a mixture of
the two methods. When an ETS is implemented without linking
with other foreign markets, total emission permits allocated to all
domestic industrial sectors determine the costs of such an ETS
irrespective of emission permits assigned to any individual in-
dustry. Specifically, all industries would seek an intermediate level
of their MACs based on their emission levels so that they only need
to pay for their real emission levels. If they emit more than their
allocated permits, they need to buy extra permits from other sec-
tors, and vice versa, when no permits are traded internationally. In
the modeling, there is only a unique permit price. That is, purchase
and repurchase of permits between industrial sectors and gov-
ernment and among industrial sectors are processed at one price of
permits only. For example, industrial sectors initially purchase
permits at $10 per permit (e.g., an equivalent to one ton of CO2 or
equivalent emissions) from the central government, these indus-
trial sectors then exchange their permits in the domestic market at
$10 per permit, depending on emission levels from their produc-
tion processes. In the case of international linkages, the mechanism
works similarly but in broader markets.
The model, in general, describes an entire domestic economy for
each region with interactions of all agents related to flows of
commodities, income and capital, based on sets of equations
derived from economic theory. For example, producers minimize
costs subject to given technologies based on the constant elasticity
of substitutions production function. Households maximize their
utility, subject to given budgets, while governments are modeled to
achieve balanced budgets. Households and government are final
users, whereas intermediate users are industries that use outputs
produced by other industries as the inputs for their production
processes. Industries also hire workers and capital equipment, and
purchase other necessary resources such as land and other natural
resources. Households earn income from their supplies of labor and
transfers from governments. Besides expenses for final consump-
tions, households also pay income tax. The difference between
expense and income is a household’s saving. Government, on the
other hand, collects taxes from households, industries and other
institutions that enter the market, such as foreign entities. All
countries are consequently linked together through a mechanism
of bilateral trade of goods and services.
The variables related to emission levels are incorporated into the
model by linking them with quantity of outputs produced by in-
dustries and quantity of outputs consumed by industries, house-
holds, and governments. These emission level variables are also
linked to utilization of endowment. Revenues from selling permits
are initially collected by the central governments and may be
recycled by transferring to households in lump sum or support
for industries with different levels of subsidies, depending on the
decision made by modelers. More information on the model
structure and possible scenario design can be found in Nong and
Siriwardana [17].
We have used the GTAP-E database version 9 with the base year
2011, which contains data for 140 regions and 57 industries. The
database also consists of the Carbon Dioxide (CO2) emission levels,
which are related to the level of consumptions (or combustions) of
chemical products and fossil fuels by households, governments and
industries. We also incorporated non-CO2 emissions into the
database, which was compiled by the GTAP group, in order to
capture comprehensive emission levels in all economies. We
aggregated 140 regions in the database into seven regions and 57
industrial sectors into 18 industries, which are presented in
Table A1 in the Appendix.
624 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629
3.2. Simulation design
In our analysis we used the emission targets that each country
committed to at the Paris Climate Change Conference to reduce
their emission levels [1]. These targets are provided in the second
column of Table 1. Of these, China and India used other measures
for their emission targets, that is, they commit to reduce their
emission intensities of GDP by 2030 relative to 2005 levels. Hence,
we calculate their 2030 targets as follows:
CO2 e2030 CO2 e2005
¼ ð1
emission intensity reductionÞ 
GDP2030 GDP2005
⇔CO2 e2030 ¼ ð1
emission intensity reductionÞ
GDP2030 *CO2 e2005
 imposed on the economy is determined by the total number of
GDP2005
We collected their GDP2005 from the World Bank [18] and their
GDP2030 from the Organisation for Economic Co-operation and
Development [20]. The emission levels of China and India in 2005
(CO2-e2005) are collected from UNFCCC [21]. We finally revert these
emission targets, based on the emission growth rates between
2000 and 2010, to the 2011 emission targets that are used in the
simulation because GTAP-E is a static model with the database
related to 2011. Among the six regions, only Russia is estimated to
provide an insufficient effort to reduce emissions [22]. The emis-
sion target of the U.S. is regarded as low since it is closer to the
inadequate level, while Brazil, China, the European Union and India
are estimated to have high abatement levels.
In the simulation of the two scenarios, we assign these targets to
respective industrial sectors in each country or region. Hence, the
number of permits allocated to the industrial sectors is equivalent
to their remaining emission levels. In addition, all permits are
auctioned and the entire revenues transferred to corresponding
households in each country or region in a lump sum. In Scenario 1,
we assume that all selected countries run their domestic ETSs
without any international linkages so that all these countries (re-
gions) maintain their commitments to achieve the targets sub-
mitted to the United Nations (i.e., Paris Agreement). In Scenario 2,
the U.S. withdraws from the Paris Agreement; hence, there is no
price on emissions introduced in the U.S. via an ETS, while ETSs are
still used in other countries or regions. The analysis only reports the
outcomes in terms of differences between with and without the
introduction of an ETS in the U.S. We used the long run closures in
both scenarios with several key assumptions. For example, real
wage is flexible in the long run, while the national employment
level is fixed. Capital stock can be changed either at aggregate or the
industry level, whereas the rate of return on capital is fixed. In
addition, the average propensity to consume is fixed allowing
household consumptions to move in line with changes in income
levels.
Table 1
Emissions reductions from the 2011 levels. Note: a emissions reduction in 2025 relative to the 2005 level;
Country/Region Targeted emissions reductions by 2030
Russia 30% relative to
United States 28% relative to
China 60% relative to
European Union 28 40% relative to
India 33% relative to
Brazil 43% relative to
Source: [1] and authors’ calculations.
4. Simulation results and analysis
This section provides the potential economic impacts on the U.S.
economy and energy sectors if the U.S. withdraws from the Paris
Agreement. The results are reported according to what the U.S.
economy would achieve if the emission target of 28% reduction
compared to the 2005 emission level was not adopted. Hence,
projections presented in the following sections were obtained as
the difference between with and without an ETS for the U.S.
4.1. Macroeconomic results
Table 2 provides key macroeconomic impacts that the U.S.
economy may experience as a result of withdrawing from the Paris
Agreement. Should the U.S. introduce an ETS to meet the emission
target, there is a cost to the country because industrial sectors
would be required to pay for their emissions. The level of cost
permits allocated or the national emission target, and the country’s
ability to switch to cleaner energy sources. The costs incurred by
emissions particularly would lead to increased costs of production,
thereby increasing the costs of outputs and general costs of living.
As a result, when the U.S. withdraws from the Paris Agreement and
there is no longer such a climate change policy, the consumer price
index would be lower by 0.96% than in a scenario of having to cut
emissions by 28%. That is, the potential increase in costs is elimi-
nated and the country would enjoy lower levels of prices for
commodities generally.
When there is no price on emissions, the real price of invest-
ment will decrease by 0.68%, leading to an increase in investment of
2.58% in the long run. The U.S. economy will expand with increased
production levels. As a result, demand for labor will increase,
leading to an increase in real wages of 1.54%. Such an increase in
real wages causes a rise in the cost of labor relative to the cost of
capital encouraging industrial sectors to substitute capital for labor.
Since, the national employment level is fixed in the long run, the
substitution of capital for labor becomes a relatively cheap option
for industrial sectors. Consequently, capital stock will increase by
2.53%.
The lower consumer prices and higher real wages would expand
private consumption by 0.78%. The government, however, only
increases its real consumption by 0.44%. The difference between
real private consumption and public consumption is due to the fact
that households experience an income increase from real wages in
addition to price reductions as experienced also by the govern-
ment. In addition, the market baskets are also different between
these two final consumers. The U.S. government mainly uses ser-
vices with less outlay on energy or emission-intensive commod-
ities. Hence, its real consumption would not change considerably
when an ETS is abolished, as prices for services do not change
dramatically between these two cases. Households, on the other
hand, allocate their budgets on a variety of goods and services,
including the major consumption items such as electricity, oil and
b
Reductions per unit of GDP.
Emissions cuts relative to the 2011 emissions levels
1990 level 5%
a
2005 level 17%
b
2005 level 37%
1990 level 16%
b
2005 level 19%
2005 level 33%
 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629
Table 2
The differences in the U.S. macro economy (percentage change).
Consumer price index
Capital stock
Real price of investment
Real wage rate
Real GDP
Real investment
Real government consumption
Real private consumption
Real export
Real import
Terms of trade
Real price of coal
Real price of crude oil
Real price of natural gas
Real price of petroleum products
Real price of electricity
Equivalent variation ($ million)
Note: Effects on the U.S. economy are computed by taking the difference between
with and without an ETS.
petroleum products, which experience severe downward changes
in prices when the U.S. leaves the Paris Agreement.
The overall reduction in domestic prices would lead to
decreased export prices relative to import prices so that terms of
trade would deteriorate by 0.55%. Real U.S. exports would be
recovered since the prices of exports would be reduced. For
example, real exports would increase by 2.61% when the country no
longer suffers from the costs of an ETS. The U.S. producers are
relieved from a cost burden of a climate policy enabling them to
expand their production levels, thereby increasing their demands
for inputs. Consequently, real import would increase by 1.65%. In-
creases in household’s and government’s demands, including de-
mands for foreign products, would also contribute to increased
national imports.
Table 2 shows the real GDP of the U.S. expands by 1.13%. This
means that the U.S. could avoid losing $175 billion, if it abandoned
its commitment to the Paris Agreement. This is not a large change
relative to the size of real GDP of the U.S. economy; nevertheless, it
can maintain its economic growth without such abatement costs
on the economy.
When there is no cost on emissions, the producers are not under
pressures to switch to cleaner energy to moderate the costs on
production. In that case, the economy returns to the normal level so
that producers demand for all types of energy inputs according to
existing technology. For example, with the current technology, the
cement-manufacturing sector would initially use $5 billion worth
of coal in their production processes and $500 million worth of
natural gas and petroleum products. Hence, when there is no cost
on their emissions, there is no motivation to substitute natural gas
and petroleum products for coal in order to reduce their emission
levels. On the other hand, they will continue to use coal according
to their current machinery and technology. Hence, there will be
increases in demand for coal, that is an emission-intensive input.
The reduced production costs without environmental policy
pressure would increase the overall production levels, leading to
increased demand for all energy inputs. Supplies of energy would
also accelerate due to lower costs of production. Consequently,
prices of energy would be expected to fall. Reductions in energy
prices also need to be clarified since demand and supply are subject
to changes simultaneously. In the U.S., demands for energy are
more elastic than their supplies as assumed by assigned parame-
ters; hence, prices for energy would be reduced in the new equi-
libriums when costs on emissions are no longer an issue. The price
of coal declines at a faster rate than the reductions in the prices of
other energy sources because in the case of an ETS, industrial
625
sectors tend to readily substitute other energy inputs for coal. As a
result, demands for, and supplies of coal will decline at a much

0.96 higher rate relative to changes of demands and supplies of other
3.53 energy sources.

0.68 The U.S. economy may see the energy price reduction as a
1.54
1.13
considerable gain because energy plays a very important role
2.58 throughout the entire economy. In particular, fossil fuels become
0.44 cheaper when there is no price on emissions; hence, electricity
0.78 generation becomes a significant winner without a climate change
2.61
policy. Considerable reductions in input costs for the electricity
1.65

0.55 generation sector will result in substantial reductions in the price of

91.6 electricity that will benefit the country, particularly households. For

7.8 example, reduction in a real electricity price by 17.8% is a major

26.3 windfall for the country that would increase households’ welfare.

5.7

17.8
In addition to the reductions of energy prices and prices of other
96,910.2 commodities, an increase in the regional income would also
contribute to increases in welfare. As a result, the welfare gain
measured in terms of equivalent variation turns out to be $97
billion. Hence, taking a conservative view, the retreat from the Paris
Agreement would be seen as an improvement in the U.S. economy
at the expense of the environment.
According to the United Nations sustainable development
goals,7 the abolishment of a climate change policy or the retreat
from the Paris Agreement would help the U.S. to improve their
ability for achieving several economic goals. For example, the
employment rate is improved nationally so that more people will
have jobs. People will also receive higher real wage rates due to
higher demands for labor. These facts considerably help people to
increase their income and consumption levels, consequently
reducing poverty and probably other social problems, such as crime
rates. Higher incomes in the long term would also help citizens to
improve education attainments as they choose better education
services. However, the continuous increase in emission levels
might become a major environmental issue, not only at the national
level but also at the global level because the U.S. emission level will
be seen as relatively high compared with other countries. Such
increased emission levels may cause negative effects on sustainable
development in terms of the environmental effects [23].
The U.S. accounts for about 12% of the global emissions [1];
hence, if the U.S. emission level continues to grow at the current
rate, it may encourage emission abatement efforts by other coun-
tries to be less meaningful. As a result, the international target to
limit the increased global temperature below 2 degrees Celsius
may be frustrated. It is evidence from wide scientific findings that
higher temperatures due to increased greenhouse gases worsen
natural disasters, including storms, floods, droughts, etc.8 In addi-
tion, higher temperatures may cause wildlife extinctions and
higher instances and worse forest fires including forests in Cali-
fornia and other parts of the U.S. and worldwide disasters such as
the loss of the huge Great Barrier Reef in Australia.
4.2. Effects on energy sectors
Fig. 1 shows the effects on the energy sectors in the U.S. when
the country has withdrawn from an ETS. It is important to notice
that these energy sectors no longer bear any financial burden due to
their emissions generated by production and transportation activ-
ities. When production costs fall, the coal mining sector increases
its production levels considerably, reporting a possible expansion
7
See https://sustainabledevelopment.un.org/?menu¼1300.
8
See, for example, https://www.nrdc.org/stories/are-effects-global-warming-
really-bad?gclid¼EAIaIQobChMI0dCl1cvY2gIVjEwNCh1WigtVEAAYAiAAEgLAGvD_
BwE.
626 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629
35
28.8
30
26.3 26.6 25.3
25
20
15
10
5.7
5 2.8 2.9
2.0
0
Fig. 1. Percentage changes in output and emissions levels of the energy sectors in the U.S.
of 26.3%. The natural gas extraction sector also experiences a
noticeable growth in their activities when there is no price to pay
on emissions. Its output level consequently expands by 25.3%.
Increases in the production levels of crude oil extraction and
other mining sectors are not as large as the expansions of the coal
mining and natural gas extraction sectors. For example, the pro-
duction level of the crude oil extraction sector would expand by 2%,
while it is 2.8% for the other mining sector. This is because coal and
natural gas are high emission-intensive energy goods and they are
the main combusted inputs in the electricity generation sector. Coal
and natural gas are also used by many other sectors, such as the
cement and manufacturing sectors. As a result, when there is no
cost on emissions, industrial sectors, particularly the electricity
generation sector, increase their usual demands for coal and natural
gas. In addition, crude oil is mainly used to transform petroleum
products in the petroleum products manufacturing sector; hence,
there is only a small emissions by using crude oil relative to the
consumption or combustion of coal and natural gas. On the other
hand, the consumption of crude oil commodity is not a high cost
burden in the case of an ETS. As a result, the crude oil extraction
industry is likely to change only slightly if an ETS is introduced. This
leads to a relatively small effect on this industry when such an ETS
is not in operation. Similarly, the other mining sector also releases a
very small amount of emissions; hence, this sector is not affected
greatly by an ETS. The effects on this industry are therefore rela-
tively small if such an ETS is avoided.
The output level of the electricity generation sector would in-
crease by 14.1%. The higher level of electricity generation is a result
of two effects: on one hand there is an increased demand with the
lower price of electricity and on the other hand supply is induced
by cheaper energy inputs. The gas supply sector is also not affected
by an emissions related cost increase and its output expands by
7.7%.
Fig. 1 also reports emission levels of each of the energy sectors in
the U.S. economy. If a sector can substitute low emission-intensive
inputs (i.e., natural gas and/or petroleum products) for high
emission-intensive inputs (i.e., coal and/or crude oil), the variation
in emission levels of that sector will be different to the variation of
its output. There is no such input substitution in the coal mining
sector because most emissions in this sector come from their pro-
duction processes and fugitive emissions. Hence, the emission level
of the coal mining sector changes at the same rate as its expansion
at the production level.
Other energy sectors show their ability to switch to lower
emission-intensive inputs when an ETS is implemented so that they
29.2
14.1
9.5
7.7
4.9 5.1 Output
Emissions levels
can lower the burden on their emission costs. As a result, when an
ETS is not in place, these other energy sectors tend to continue
using high emission-intensive energy sources according to their
current technology and condition of equipment or machinery. This
leads to increases in their emission levels which will be higher than
the increases in their production levels. In particular, the electricity
generation sector uses all types of fossil fuels for their production
activities according to current technology. With an ETS in action,
they may be forced to substitute natural gas or petroleum products,
for example, for coal to reduce their emission levels. However,
when such an abatement policy is not in place, the sector is not
obliged to maintain such low-emission technologies. Hence, power
generation will return to use more coal for their production pro-
cesses as usual. It is also noted that 40% of electricity generation in
the U.S. comes from using coal as shown in the database. This will
lead to a much higher growth in emission levels compared with the
growth of production level of the electricity generation sector. It is
noted that the emission level of the electricity generation sector
increases by 29.2%, whereas its production level increases by only
14.1%.
The aforementioned results indicate that the abolition of an ETS
in the U.S. creates no incentives for firms to develop and use clean
production technologies. In other words, cheap fossil fuels are still
dominant in energy consumption and will keep growing. Further-
more this rate of increase may cause unsustainable development
since renewable technology is unlikely to be developed [24].
Fig. 2 indicates the percentage changes in exports of major en-
ergy commodities from the U.S. to key export destinations. Coal and
petroleum products are the dominant energy goods exported by
the U.S. according to the GTAP database. In this study, as ETSs are
introduced in these destination countries, they tend to lower de-
mand for energy resources, including those from other countries.
However, when an ETS is removed from the climate policy in the
U.S., there will be considerable reductions in prices of energy and
demand for the U.S. energy exports will increase despite stringent
abatement targets adopted by importing regions. China and India
show fairly elastic demands for coal exported from the U.S
compared to other countries. Exports of coal from the U.S. to China
and India respectively increased by 38.2% and 35.3%. An increase in
export of petroleum products from the U.S. to other countries is
much lower than the increases in the export of coal because the
price of coal will have fallen rapidly in the absence of a climate
policy in the U.S.
Fig. 3 shows the percentage changes in imports of major energy
commodities by the U.S. from various countries or regions. Crude oil
 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629 627

Table 3
Coal Petroleum products Parameters are changed in the systematic sensitivity analysis.
45 CES function Original values for industries
40 38.2
35.3 Capital-energy From 0 to 0.5
35 Electricity-nonelectricity From 0 to 1
30 Coal-noncoal From 0 to 0.5
Oil, gas, petroleum products From 0 to 1
25
Note: all parameters are varied together for all industries in all regions in the sys-
20
12.7 tematic sensitivity analysis. The original parameter values are provided by Ref. [28].
15
10.0 10.9
10
5.2 5.0 5.6 4.9 composite, (iii) between coal and non-coal composite, (iv) between
5 3.6
oil, gas, and petroleum products. We changed these parameters
0 together by ± 100% for all industries in all regions.
Russia India China Brazil EU28
In Table 4, the results in column (2) are repeated from those in
Table 2 that show the initial results from simulating the model with
Fig. 2. Percentage changes in U.S. exports of major energy.
the original parameters. Lower and upper bound results are shown
in columns (3) and (4) respectively and indicate the minimum and
and petroleum products are the two main energy commodities maximum results at a 95% confidence interval for fluctuations of
imported to the U.S. When the country abolishes an ETS, the U.S. results when we change the parameters by ± 100% for all industries
producers will expand their production levels, thereby increasing in all regions. It is indicated in column (5) that results change
demands for inputs. This will lead to an increased demand for widely in large ranges when these parameters are altered. In other
imported energy commodities. Import of crude oil from India, words, results are very sensitive, relative to such changing pa-
China and the European region is very small. Hence, changes in rameters. Some values of parameters also yield implausible results.
imports from these countries are insignificant and are not reported. For example, it is unrealistic that real GDP would decline in some
The U.S. imports of petroleum products will increase at different instances when the U.S. abolishes the ETS.
rates, reflecting different changes in export prices from these
countries. For example, cif price of petroleum products exported
from the European Union to the U.S. market only increases by 0.5% 5. Concluding remarks
compared to an increase of 1.1% from Russia to the U.S. As a result,
imports of petroleum products by the U.S from European markets President Donald Trump announced that the U.S. would with-
will increase by 8.5%, whereas such imports from Russia will only draw from the Paris Agreement if there was no better agreement
increase by 2.3% when the U.S. producers increase their demands that makes it ‘fair’ for the U.S. The retreat may go ahead but the
for petroleum products. withdrawal process may only be completed by November 2020 at
the earliest. However, in the interim, the U.S. does not necessarily
4.3. Sensitivity analysis need to meet any target that they committed to at the Paris
Agreement. Under such a situation, the U.S. does not need to
As discussed widely in the literature, parameters assumed in the introduce any mechanism to reduce its emissions.
model may considerably affect the CGE modeling results [25,26]. In This paper considers this issue to assess the potential economic
addition, some sets of parameters are more crucial than others that impacts on the U.S. economy of its foreshadowed departure from
may cause major changes in the economy-wide impacts of a climate the Paris Agreement. We assume that if the U.S. follows the terms in
change policy. Several studies concluded that substitution param- the Agreement, it will introduce a climate change policy to support
eters related to energy commodities would substantially affect the the country to meet the target. We also assume that the U.S. and
economy and each particular energy sectors [17,27]. We therefore other countries or regions implement climate change policies by
conducted a systematic sensitivity analysis in order to examine introducing ETSs in their economies. Should the U.S. withdraw
how sensitive the results would be due to altering parameters. Four from the Paris Agreement, it will subsequently abolish such an ETS.
sets of parameters were selected for alterations as shown in Table 3, We examine the impact on the U.S. economy of such an anti-climate
they are the elasticities of substitution (i) between capital and en- change policy by identifying the differences in the U.S. economy
ergy composite, (ii) between electricity and non-electricity when it has moved away from implementing an ETS.
The findings suggest that the retreat from the Paris Agreement
and the decision not to take a climate change policy action would
Crude oil Petroleum products strengthen the U.S. economy. This is quite expected in view of the
9 8.5 potential climate change policy costs that would otherwise be
8 avoided. Real GDP would increase by 1.13% or $175 billion, while
7 real private consumption would increase by 0.78%. Welfare in terms
5.5
of dollar values would also increase by $97 billion. Although these
6
macro effects are not large relative to the size of U.S. economy, the
5
3.8 4.1 effects on the energy sectors are substantial. Energy prices would
4
3.1 fall considerably if the U.S. places no price on emissions. For
3 2.3 2.3 example, the price of coal would fall by 91.6%, while price of natural
2 gas would decline by 26.3%. In particular, the country would
1 experience a much lower price for electricity (17.8% reduction).
0 When there is no formal climate policy such as an ETS, the energy
Russia India China Brazil EU28 sectors in the U.S. will expand rapidly, particularly the sectors such
as coal mining (26.3%), the natural gas extraction (25.3%), and the
Fig. 3. Percentage changes in U.S. imports of major energy. electricity generation (14.1%). Hence, findings from this study
628 D. Nong, M. Siriwardana / Energy 159 (2018) 621e629

Table 4
The sensitivity analysis results for key macroeconomic variables when the energy-related parameters are varied by ± 100%.

Macroeconomic results (1) Center parameters (2) Lower bound (3) Upper bound (4) Difference between upper and lower bounds (5)

Real GDP 1.13
0.12 2.48 2.59

Real investment 2.58
0.45 5.89 6.35
Real government consumption 0.44
0.02 0.88 0.89
Real private consumption 0.78
0.02 1.58 1.61
Real export 2.61 0.86 4.52 3.67
Real import 1.65 0.48 2.98 2.50
Real price of coal
91.6
169.63
18.99 150.64
Real price of crude oil
7.8
8.67
6.97 1.70
Real price of natural gas
26.3
48.56
5.64 42.91
Real price of petroleum products
5.7
11.42
0.42 11.00
Real price of electricity
17.8
33.57
3.09 30.49

Note: Columns (3) and (4) report the 95% confidence interval for results from varying the parameters by ± 100% in the CES functions (Table 3) to substitute (i) between capital
and energy, (ii) between electricity and nonelectricity, (iii) between coal and noncoal, and (iv) between oil, gas, and petroleum products. Upper (lower) bound results indicate
the maximum (minimum) values for the corresponding variables when these parameters are varied by ± 50%.

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