An employment double dividend and welfare in a North–South model of trade with or without international policy coordination

Should developed and developing countries reduce emissions in complete harmony? To answer this question, we develop a simple North–South model of trade in which homogeneous firms in the South produce intermediate goods, heterogeneous firms in the North produce and export final goods, and pollution travels across countries. Using our framework, we first analytically show that without international policy coordination, Northern environmental policies may or may not deliver an employment double dividend (EDD) in the North but has no effect on the aggregate employment and emissions in the South. In contrast, Southern environmental policies never deliver an EDD in both countries. With international policy coordination, common environmental policies may or may not deliver an EDD in both countries. Whether the Northern, Southern, and common environmental policy improve welfare is uncertain across all cases with or without international policy coordination. We then numerically show that, to maximize world welfare, the North must impose much stricter environmental regulations than the South. In a baseline scenario, unless both countries initially regulate to some extent, international policy coordination is ineffective. When people suffer more badly from pollution as it accumulates, however, it can be effective. This is more likely in the presence of transboundary pollution.