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Free-riding, carbon treaties, and trade wars: the role of domestic environmental policies

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  • Hc Economic History And Conditions
  • Ecology
  • Geography


This paper uses a calibrated general-equilibrium model of North-South trade with carbon emissions to explore the strategic, open-economy implications of price- and quantity-based instruments for CO2 emission reduction. We compute non-cooperative environmental and trade policy equilibria and Nash bargaining outcomes in environmental policies with side payments of cash. Results show that quotas can lead to higher internalization levels in a non-cooperative zero-tariff equilibrium in comparison with emission fees. If tariffs are also chosen non-cooperatively, the form of policy instrument used affects equilibrium tariffs, with quotas leading to lower trade barriers, particularly under a regional carbon treaty. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: Q3; Q4; F1.

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