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We analyse the welfare effects of environmental policy arising from the formation of an international environmental agreement on the participating and non-participating countries and thus shed light on the potential incentives for a country to join such an agreement. Within a N-country Q-goods general equilibrium framework under free-trade conditions, we consider unilateral and cooperative policy settings and, within the latter, country-specific and fully harmonized policies within the agreement. A key result of the paper is the emergence of a negative relationship, arising from terms of trade effects, between the welfare changes of the participating and non-participating countries following the formation of the agreement. These however do not result in a zero sum welfare outcome for the world as a whole.

The Antweiler Pollution Terms of Trade Index (PTTI) measures environmental gains or losses sustained by a country from international trade. Measuring total exports and imports in value terms distorts the results when the index is used for comparisons and analysis. Structural Decomposition Analysis (SDA) can provide an estimate of such distortions, due to price effects. This paper proposes a procedure of SDA of PTTI changes to deal with this problem. It measures impacts of changes in prices of traded outputs, changes in the real trade mix and volume, and changes in technology, but can be extended to account for other factors too. The pollution content refers here to pollution generated directly in the production of outputs, actually traded in the international markets. However, additional induced effects due to international trade can be included, if they are estimated. Pollution intensity is expressed per unit of total exports and imports respectively, and not per unit of value added, an issue discussed. A case study for The Netherlands is provided for the period [2007][2008][2009][2010]. PTTI values and their annual changes are estimated for emission contents in greenhouse CO2 equivalent. Results confirm the significant and distortive role of prices in measurements and comparisons.

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