Unequal vulnerability to climate change and the transmission of adverse effects through international trade

In this paper, we consider the unequal distribution of climate change damages in the world and we examine how the underlying costs can spread from a vulnerable to a non-vulnerable country through international trade. To focus on such indirect effects, we treat this topic in a North-South trade overlapping generations model in which the South is vulnerable to the damages entailed by global pollution while the North is not. We show that the impact of climate change in the South can be a source of welfare loss for northern consumers, in both the short and the long run. In the long run, an increase in the South's vulnerability can reduce the welfare in the North economy even in the case in which it improves its terms of trade. In the short run, the South's vulnerability can also represent a source of intergenerational inequity in the North. Therefore, we emphasize the strong economic incentives for non-vulnerable - and a fortiori less-vulnerable - economies to reduce the climate change damages on - more - vulnerable countries.