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

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...

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Bibliographic Details
Published in:Environmental & resource economics 2010-12, Vol.47 (4), p.495-520
Main Authors: Bednar-Friedl, Birgit, Farmer, Karl, Rainer, Andreas
Format: Article
Language:English
Subjects:
Capital accumulation
Climate
Climate change
Climate policy
Consumption
Cost control
Debt
Domestic
Economic models
Economic Policy
Economics
Economics and Finance
Emission
Emission permits
Emissions
Emissions control
Emissions trading
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Environmental policy
Expenditures
Falling
Global economy
Kyoto Protocol
Overlapping generations
Overlapping-generations model
Permits
Raw materials
Studies
Terms of trade
Welfare
World economy
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Summary: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.
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-010-9390-5