Trade barriers and CO2

We highlight the key role of changes in the transportation and use of intermediate inputs in determining the CO2 consequences of reductions in trade barriers such as tariffs and transportation efficiency improvements. Reductions in trade barriers increase gross flows relative to value added – a lengthening of value chains – thereby increasing transportation emissions. Reductions in trade barriers also increase wages relative to the price of other goods, which increases the quantity of intermediates relative to labor used in production and, therefore, emissions per value added. Liberalization schemes that temper these channels could achieve substantial output increases with modest increases in CO2.