Carbon policy and the structure of global trade

Alternative perspectives on the structure of international trade have important implications for climate policy and its interaction with global markets. In this paper we consider carbon policy in the context of three important alternative trade formulations. First, is a neo-classical model based on trade in homogeneous products, which is the natural context for considering competitive effects of trade and environmental policy. Second is a model based on regionally differentiated goods consistent with the Armington assumption adopted in the policy simulation literature. Finally, we consider a monopolistic-competition model, consistent with Melitz (2003), which is the focus of many contemporary theoretic investigations in international trade. These structures have important implications for carbon leakage and the spatial distribution of energy-intensive production. Furthermore, predictions about the transmission of policy burdens to non-participating countries are critically dependent on the assumed structure of trade.