Emissions Trading and International Trade

Abstract

We explore the effects of international trade in goods and emission permits on global warming and welfare in a two-country, two-good, general-equilibrium model with both Ricardian and Heckscher-Ohlin features. According to our findings, international commodity trading cannot successfully reduce greenhouse-gas (GHG) emissions if the comparative advantage stems from differences in per-capita emission allowances; however, it may reduce emissions if the comparative advantage is also based on differences in technologies. International emissions trading cannot mitigate global warming. Whether it improves welfare would depend on how it affects the terms of trade in goods and climate change. A country with high per-capita emission allowances may import permits and suffer from deterioration in the terms of trade in goods.