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Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy

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Author Info
Karl Farmer ()
Birgit Friedl ()
Andreas Rainer ()
Abstract

We present a two-good, two-country overlapping generations model where emissions arise from production and each country has a domestic emission permit system. When one country unilaterally reduces her cap on emissions, her output available for domestic and foreign consumption diminishes more than in the other country. With unchanged consumption expenditure shares for both goods the terms of trade improve, while capital stocks decline in the reducing and less strongly in the non-reducing country. The net welfare effect of improving terms of trade and falling capital stocks is negative in both countries. However, if the country which unilaterally reduces her emission permits is a net creditor to the world economy, her own welfare loss remains below that of the non-reducing country.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2375.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2375

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Related research
Keywords: capital accumulation; emission permits; terms of trade; overlapping generations; welfare;

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting

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  1. Persson, Torsten, 1985. "Deficits and intergenerational welfare in open economies," Journal of International Economics, Elsevier, vol. 19(1-2), pages 67-84, August. [Downloadable!] (restricted)
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  2. Stef Proost & Denise Van Regemorter, 2003. "Climate change policy in European countries and its effects on industry," Energy, Transport and Environment Working Papers Series ete0305, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
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  3. Babiker, Mustafa H., 2005. "Climate change policy, market structure, and carbon leakage," Journal of International Economics, Elsevier, vol. 65(2), pages 421-445, March. [Downloadable!] (restricted)
  4. Tetsuo Ono, 2002. "The Effects of Emission Permits on Growth and the Environment," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 75-87, January. [Downloadable!] (restricted)
    Other versions:
  5. Yoshiyasu Ono & Akihisa Shibata, 2005. "Fiscal Spending, Relative-Price Dynamics, and Welfare in a World Economy," Review of International Economics, Blackwell Publishing, vol. 13(2), pages 216-236, 05. [Downloadable!] (restricted)
  6. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May. [Downloadable!] (restricted)
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  7. Onno Kuik & Reyer Gerlagh, 2003. "Trade Liberalization and Carbon Leakage," The Energy Journal, International Association for Energy Economics, vol. 24(3), pages 97-120.
  8. van Asselt, Harro & Biermann, Frank, 2007. "European emissions trading and the international competitiveness of energy-intensive industries: a legal and political evaluation of possible supporting measures," Energy Policy, Elsevier, vol. 35(1), pages 497-506, January. [Downloadable!] (restricted)
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