DP9799 Per-Capita Income as a Determinant of International Trade and Environmental Policies
|Author(s):||James R. Markusen|
|Publication Date:||January 2014|
|Keyword(s):||international negotiations, non-cooperative environmental policy, Trade and environment|
|JEL(s):||F1, F18, Q56|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9799|
International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand and preferences. The specific context is an international environmental externality such as carbon emissions, and I assume a high income elasticity of demand for environmental quality. I analyze how per-capita income differences between two countries affect their abatement efforts in a non-cooperative policy-setting game. This outcome can then be used as a disagreement point to analyze cooperative Nash bargaining. In both outcomes, the poor country makes a lower abatement effort in equilibrium; indeed, it may make none at all and cooperative bargaining with only abatement levels as an instrument may offer no gains. Other features include a novel terms-of-trade externality in which an abating country passes on a part of its abatement cost to its trading partner, in which case the non-cooperative and cooperative outcomes are identical under special symmetry assumptions. When per-capita income differences are large, the poor country may be worse off when the rich country abates. Finally, I examine ?issue linking? in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.