Is trade liberalization conducive to the formation of climate coalitions?

Abstract

The present paper analyzes the impact of moving from autarky to international trade on the formation of self-enforcing international environmental agreements with Nash coalitions. With and without trade, stable coalitions consist of two countries at most-in contrast to the model that portrays coalitions as Stackelberg leaders (Eichner and Pethig in Public Econ 102:37-50, 2013). Although the coalition steps up its mitigation effort in the transition from autarky to trade, world emissions rise and thus constitute a 'green paradox of trade liberalization.' Opening the borders not only increases global pollution, but also reduces the aggregate welfare of all countries.

Self-enforcing environmental agreements and capital mobility

“…As reported above, Eichner and Pethig (2013b) found no stable coalitions consisting of three or more countries. Similarly, in the present paper we will demonstrate that there exist small stable coalitions with two or three member countries.…”

“…But unfortunately, such coalitions hardly reduce climate damage below its level in the non-cooperative scenario -regardless how large they are. When the coalition plays Nash along with all fringe countries (Eichner and Pethig 2013b), stable conditions are both small and ineffective similar as in the basic model without trade.…”

“…In Eichner and Pethig (2013b) and, to our knowledge, also in the entire theoretical literature on the formation of IEAs emissions taxes are strategic substitutes which is why grand coalitions are always unstable in that literature.…”

“…Here we will take up the analytical framework of Eichner and Runkel (2012) with some minor simplifications 3 to investigate the formation of stable coalitions when the fringe countries as well as the coalition play Nash. Although our approach shares with Eichner and Pethig (2013b) both Nash behavior on the part of the coalition and international trade, the pertaining models differ significantly. In Eichner and Pethig's one-period model there are world markets for a composite consumption good and fossil fuels; fuels are extracted and consumed by the countries' residents along with a consumption good that is produced without using fuel as an input.…”

Building Climate Coalitions on Preferential Free Trade Agreements

“…The difficulty one might experience here obviously lies in determining the trade pattern prevailing inside the free trade area as well as outside to properly assign the free trade privileges. Therefore, in the paper we consider a model in the tradition of the strategic trade theory whose basic framework goes back to Eichner/Pethig (2012, 2013a, 2013b, 2015a, 2015b. It includes the environment in form of an unwanted by-product, greenhouse gas emissions, modeled as a global public bad.…”