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Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy

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  • Birgit Bednar-Friedl
  • Karl Farmer
  • Andreas Rainer

Abstract

We present a two-good, two-country overlapping generations model where emissions arise from production and each country has a domestic emission permit system. When one country unilaterally reduces her cap on emissions, her output available for domestic and foreign consumption diminishes more than in the other country. With unchanged consumption expenditure shares for both goods the terms of trade improve, while capital stocks decline in the reducing and less strongly in the non-reducing country. The net welfare effect of improving terms of trade and falling capital stocks is negative in both countries. However, if the country which unilaterally reduces her emission permits is a net creditor to the world economy, her own welfare loss remains below that of the non-reducing country.
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  • Birgit Bednar-Friedl & Karl Farmer & Andreas Rainer, 2010. "Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(4), pages 495-520, December.
    • Handle: RePEc:kap:enreec:v:47:y:2010:i:4:p:495-520
    DOI: 10.1007/s10640-010-9390-5
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    6. Karl FARMER & Birgit BEDNAR-FRIEDL, 2009. "External Balance, Dynamic Efficiency, and the Welfare Costs of Unilateral Permit Policy in Interdependent Economies," EcoMod2009 21500029, EcoMod.
    7. Marion Davin & Mouez Fodha & Thomas Seegmuller, 2023. "Pollution in a globalized world: Are debt transfers among countries a solution?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(1), pages 21-38, March.
    8. Mireille Chiroleu-Assouline & Mouez Fodha, 2023. "Dette, taxe et politique environnementale," Revue française d'économie, Presses de Sciences-Po, vol. 0(1), pages 55-106.
    9. McKibbin, Warwick J. & Morris, Adele C. & Wilcoxen, Peter J., 2014. "Pricing carbon in the U.S.: A model-based analysis of power-sector-only approaches," Resource and Energy Economics, Elsevier, vol. 36(1), pages 130-150.

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    More about this item

    Keywords

    Capital accumulation; Emission permits; Overlapping generations; Terms of trade; Welfare;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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