Structured literature review and modelling suggestions on the impact of trade and trade policy on the environment and the climate

This DG TRADE Chief Economist Note provides a structured overview of the existing economic literature on the interaction between environmental outcomes, trade, environmental policy and trade policy, covering both the applied methods and data as well as main findings. Analyzing the literature on Input-Output tables, it first looks at the general pattern of industrialized countries becoming net importers of embedded emissions. It then discusses quantitative trade models of different types modelling emissions along value chains and shedding light on aspects such as the roles of consumption choices at different development stages or the role of trade imbalances. The Note also looks at the rather narrow stand of literature on the importance of emissions from transportation and discusses the implications of carbon levies in general or taxes on transport emissions. Finally, it discusses the theoretical research as well as the econometric analysis and quantitative modeling, which address the questions how international trade is shaped by the role of firms that are found to play an important role in determining the effect of trade on the environment and the climate. In all strands of literature, this Chief Economist Note reflects on potential for future research. It especially identifies how model features and model approaches in quantitative trade modelling could be improved in different respects and how these models can be used for new types of policy analysis.