Unilateral OECD policies to mitigate global climate change

This article offers an alternative perspective for thinking about climate change policy when the developing countries are not participating. If industrialized countries cooperate with each other to reduce their emissions, but comply at levels below those required under the Kyoto protocol, they will have incentives to adopt policies that are more costly to the world than a carbon tax. These incentives result from terms-of-trade gains that result if conservation lowers world prices lower for fuels the industrialized countries import. We consider cases where the industrialized countries act cooperatively and non-cooperatively to achieve these gains. Because the regional terms-of-trade effects of a particular policy cancel each other at the world level, participating nations have incentives to adopt policies that are more costly to non-participants than a carbon tax that minimizes world costs.