Global Tariffs and CO2

We study the impact of existing worldwide tariffs and several tariff reform schemes on global CO2 emissions using a multi-country, multi-sector general equilibrium model with detailed input-output linkages. Our analysis reveals the importance of a simple mechanism relating trade policy to global emissions that has not been previously highlighted in the literature: reducing existing tariffs tends to increase emissions primarily by increasing the global output of intermediate inputs relative to final goods. Greater use of intermediates implies, all things equal, more fossil fuel usage and therefore more emissions per unit of global final output. This effect ultimately results from the fact that tariffs are to some extent a tax on material but not on labor. This channel accounts for the majority of the emissions increase from moving to complete liberalization, exceeding even the mechanical effect of increased GDP and overwhelming effects from reallocation of activity across countries and sectors. We find that global partial liberalization schemes that temper this channel -- especially by reducing tariff escalation -- could achieve substantial global GDP increases with small increases in CO2 or even emissions reductions.