Building Climate Coalitions on Preferential Free Trade Agreements

Abstract

In this paper, we discuss the endogenous formation of climate coalitions in the tradition of the issue-linkage literature. In particular, we propose a preferential free trade agreement on which a climate coalition should be built. The basic idea is that the benefits of free trade provide strong incentives for free riders to join the coalition. As a framework, a multi-stage strategic trade model is used in which a country may discourage greenhouse gas emissions by setting an emissions cap effective on a permit market. In addition, a discriminatory import tariff is imposed on dirty goods. However, at the heart of our approach are the trade privileges granted to coalition members shifting the terms of trade favourably without prodiving incentives towards eco-dumping. As a main result, we find that trade liberalisation is much more effective in building climate coalitions than a single-issue environmental agreement. The parametrical simulation of the model in particular shows that participation in joint emission reduction is higher, consumption patterns are more environmentally friendly, and coalitional welfare is improved. As a policy implication, negotiations on climate treaties and free trade arrangements should be integrated.

Trade–Climate Nexus: A Systematic Review of the Literature

“…In other scholar's opinion, greenhouse gas emissions can be reduced by incorporating trade restrictions without losing gains from multilateral trade cooperation (Barrett 2011). Regarding climate coalitions, Kuhn et al (2019) confirmed that emission reduction is higher, consumption patterns are more environmentally friendly, and coalition welfare is much more improved compared to the single-issued environmental agreements.…”

“…If climate treaties are designed strategically, the threat to restrict trade will suffice to enforce an agreement (Barrett 2011). When a country's participation in joint emission reduction is higher, the consumption patterns are more environmentally friendly, and welfare is much more improved (Kuhn et al 2019). Considering the welfare effects of climate policy measures, when countries impose similar tariffs and barriers on environmentally friendly and polluting industries, global CO 2 emissions tend to fall, while incomes do not change (Shapiro 2020).…”

The European Union's CBAM as a de facto Climate Club: The Governance Challenges

“…The club's political utility hinges on its ability to provide "carrots", i.e., excludable benefits to members (Hovi et al, 2016). Such club goods can take different forms, with the two most prominent being preferential trade agreements (Kuhn et al, 2019) or other forms of cooperation, e.g., on research and development, innovation or industrial initiatives (Carraro, 2017). A club can also use "sticks", either coercing non-members to join or additionally increasing the advantage for existing members through sanctions (Nordhaus, 2015;Shaw and Fu, 2020).…”

Domestic Regional Synergy in Achieving National Climate Goals—The Role of Comparative Advantage in Emission Reduction

“…In particular, when analyzing synergistic emission reduction among various regions within a country, cross-regional flows of goods and factors must be considered. Some studies have introduced trade models and new economic geography theories into game models to examine the relationships between carbon tariffs, trade barriers, and climate cooperation alliances [33][34][35]. These studies simulate and analyze cooperative behavior using assumed parameters, which cannot provide accurate characterizations of cooperative behavior based Land 2023, 12, 1723 3 of 23 on real data; however, they provide support for studying regional synergistic emission reduction from a trade perspective.…”