Melting Ice Caps and the Economic Impact of Opening the Northern Sea Route Eddy Bekkers1, Joseph F. Francois*2, and Hugo Rojas-Romagosa3 1University of Bern 2University of Bern and CEPR 3CPB Netherlands Bureau for Economic Policy Analysis May 2015 Abstract A consequence of melting Arctic ice caps is the commercial viability of the Northern Sea Route, connecting North-East Asia with North-Western Europe. This will represent a sizeable reduction in shipping distances and a decrease in the average transportation days by around one-third compared to the currently used Southern Sea Route. We examine the economic impact of the opening of the Northern Sea Route in a multi-sector Eaton and Kortum model with intermediate linkages. This includes a remarkable shift of bilateral trade flows between Asia and Europe, diversion of trade within Europe, heavy shipping traffic in the Arctic, and a substantial drop in traffic through Suez.These global trade changes are reflected in real income and welfare effects forthe countries involved. The estimated redirection of trade has also major geopolit- ical implications: the reorganisation of global supply chains within Europe and between Europe and Asia, and the highlighted political interest and environ- mental pressure on the Arctic. Keywords: Northern Sea Route, trade forecasting, gravity model, CGE models, trade and emissions JEL Classification: R4, F17, C2, D58, F18 1 Introduction Arctic ice caps have been melting as a result of global warming (Kay et al., 2011; Day et al., 2012). The steady reduction of the Arctic sea ice has been well documented (Rodrigues, 2008; Kinnard et al., 2011; Comiso, 2012), and there is broad agreement on continued ice reductions through this century (Wang and Overland, 2009, 2012; *Corresponding author; e-mail:
[email protected] 1 Vavrus et al., 2012).1 Recent satellite observations, furthermore, suggest that the climate model simulations may be underestimating the melting rate (Kattsov et al., 2010; Rampal et al., 2011).