Advertisement

Environmental and Resource Economics

, Volume 47, Issue 4, pp 495–520 | Cite as

Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy

  • Birgit Bednar-Friedl
  • Karl Farmer
  • Andreas Rainer
Article

Abstract

We present a two-good, two-country overlapping generations model where emissions arise from production and each country has a domestic emission permit system. When one country unilaterally reduces her cap on emissions, her output available for domestic and foreign consumption diminishes more than in the other country. With unchanged consumption expenditure shares for both goods the domestic terms of trade improve, while capital stocks decline in the reducing and less strongly in the non-reducing country. Improving terms of trade in the reducing country and falling capital stocks lead in total to welfare losses in both countries. However, if the country which unilaterally reduces her emission permits is a net creditor to the world economy and the Golden Rule applies, her own welfare loss remains below that of the non-reducing country.

Keywords

Capital accumulation Emission permits Overlapping generations Terms of trade Welfare 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Babiker MH (2005) Climate change policy, market structure, and carbon leakage. J Int Econ 65: 421–445CrossRefGoogle Scholar
  2. Bhagwati J (1958) Immiserizing growth: a geometrical note. Rev Econ Stud 25: 201–205CrossRefGoogle Scholar
  3. Böhringer C, Rutherford TF (2002) Carbon abatement and international spillovers. A decomposition of general equilibrium effects. Environ Resour Econ 22: 391–417CrossRefGoogle Scholar
  4. Böhringer C, Welsch H (2004) Contraction and convergence of carbon emissions: an intertemporal multi-region CGE analysis. J Policy Model 26: 21–39CrossRefGoogle Scholar
  5. Bréchet T, Lambrecht S, Prieur F (2009) Intertemporal transfers of emission quotas in climate policies. Econ Model 26: 126–134CrossRefGoogle Scholar
  6. Chen Z (1992) Long-run equilibria in a dynamic Heckscher–Ohlin model. Can J Econ 25(4): 923–943CrossRefGoogle Scholar
  7. Convery FJ (2009) Origins and development of the EU ETS. Environ Resour Econ 43: 391–412CrossRefGoogle Scholar
  8. Copeland BR, Taylor MS (2005) Free trade and global warming: a trade theory view of the Kyoto Protocol. J Environ Econ Manag 49: 205–234CrossRefGoogle Scholar
  9. de la Croix D, Michel P (2002) A theory of economic growth. Dynamics and policy in overlapping generations. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  10. Diamond P (1965) National debt in a neoclassical growth model. Am Econ Rev 55: 1126–1150Google Scholar
  11. Fischer C, Fox AK (2007) Output-based allocation of emission permits for mitigating tax and trade interactions. Energy J 24: 97–120Google Scholar
  12. Frenkel JA, Razin A (1986) The international transmission and effects of fiscal policies. Am Econ Rev 76: 330–335Google Scholar
  13. Gosh AR (1992) Fiscal policy, the terms of trade and the external balance. J Int Econ 33: 105–125CrossRefGoogle Scholar
  14. Grubb M, Neuhoff K (2006) Allocation and competitiveness in the EU emissions trading scheme: policy overview. Clim Policy 6: 7–30CrossRefGoogle Scholar
  15. Hoel M (1991) Global environmental problems: the effects of unilateral actions taken by one country. J Environ Econ Manag 20: 55–70CrossRefGoogle Scholar
  16. IMF (2006, April) World economic outlook. Technical Report. International Monetary Fund, WashingtonGoogle Scholar
  17. Jouvet PA, Michel P, Rotillon G (2005a) Equilibrium with a market of permits. Res Econ 59: 148–163CrossRefGoogle Scholar
  18. Jouvet PA, Michel P, Rotillon G (2005b) Optimal growth with pollution: how to use pollution permits? J Econ Dyn Control 29(9): 1597–1609CrossRefGoogle Scholar
  19. Kant C (2005) Capital mobility among advanced countries. J Policy Model 27: 1067–1081CrossRefGoogle Scholar
  20. Kuik O, Gerlagh R (2003) Trade liberalization and carbon leakage. Energy J 24: 97–120Google Scholar
  21. Lipton D, Sachs J (1983) Accumulation and growth in a two-country model. J Int Econ 15(1–2): 135–159CrossRefGoogle Scholar
  22. Obstfeld M (1989) Fiscal deficits and relative prices in a growing world economy. J Monet Econ 23: 461–484CrossRefGoogle Scholar
  23. Ono T (2002) The effects of emission permits on growth and the environment. Environ Resour Econ 21: 75–87CrossRefGoogle Scholar
  24. Ono Y, Shibata A (2005) Fiscal spending, relative-price dynamics, and welfare in a world economy. Rev Int Econ 13(2): 216–236CrossRefGoogle Scholar
  25. Persson T (1985) Deficits and intergenerational welfare in open economies. J Int Econ 19(1–2): 67–84CrossRefGoogle Scholar
  26. Proost S, Van Regemorter D (2004) Climate change policy in European countries and its effects on industry. Mitig Adapt Strategies Glob Change 9: 453–475CrossRefGoogle Scholar
  27. Van Asselt H, Biermann F (2007) European emissions trading and the international competitiveness of energy-intensive industries: a legal and political evaluation of possible supporting measures. Energy Policy 35: 497–506CrossRefGoogle Scholar
  28. Zee HH (1987) Government debt, capital accumulation, and the terms of trade in a model of interdependent economies. Econ Inquiry 25: 599–618CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  • Birgit Bednar-Friedl
    • 1
    • 2
  • Karl Farmer
    • 1
  • Andreas Rainer
    • 2
  1. 1.Department of EconomicsUniversity of GrazGrazAustria
  2. 2.Wegener Center for Climate and Global ChangeUniversity of GrazGrazAustria

Personalised recommendations