Terms of trade and OECD policies to mitigate global climate change

Previous economic research has identified two ways policy to mitigate global climate change could be implemented without minimizing world costs. Costs are boosted when agreements to reduce greenhouse gas emissions are limited to a subset of countries or deadlines for reducing emissions force the premature retirement of energy-using capital equipment. Stephen Brown and Hillard Huntington identify a third way global warming policy could prove more costly from a world perspective-by countries using criteria other than a fuel's greenhouse gas content when determining how to reduce their emissions. According to the authors, an individual country can reduce its own cost of cutting emissions by more aggressively reducing its use of imported fuels than its exported fuels. Such a strategy would enable a country to obtain gains in the terms of trade at the expense of its trading partners. Although shifting costs this way benefits the individual country, it raises the world cost of reducing emissions. This potential for individual countries to shift costs could influence future international agreements on global warming policy.