Self-Enforcing Environmental Agreements, Trade, and Demand- and Supply-Side Mitigation Policy

In a model of the world economy with identical countries and trade, Eichner and Pethig show that self-enforcing international environmental agreements (IEAs) may comprise up to 60% of all countries when the group of signatories curb domestic emissions via demand-side cap-and-trade policy. However, these IEAs reduce total emissions and raise welfare only slightly compared to business as usual. This paper investigates whether that poor mitigation performance can be improved upon, when governments have at their disposal a fossil-fuel supply tax in addition to the cap policy. If signatories can use the mixed policy, they choose a higher fuel supply tax than nonsignatories and thus succeed in shifting a larger share of the mitigation burden to nonsignatories. Although the number of signatories of self-enforcing IEAs is smaller with mixed than with stand-alone cap policy, the smaller IEAs achieve larger global emission reductions and higher welfare gains for all countries.