Job Market Paper
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This paper uses a three-country static model of environmental cooperation with trade to analyze the stability of international environmental agreements among environmentally heterogeneous countries. Challenges in enforcing international environmental agreements and strong free-riding incentives make international cooperation a difficult task. In the context of international trade, governments face a tradeoff between enforcing higher taxes to cooperatively reduce emissions and facing higher tariffs on exports when not cooperating.
The paper’s objectives are to: (i) determine whether environmental cooperation among heterogeneous countries provides environmental gains, overall welfare gains, or both; (ii) identify which cooperative scenarios will emerge in a stable environmental coalition to exploit these gains; and (iii) capture the effect of heterogeneity in environmental damages on the stability of these environmental coalitions. Cooperation requires that coalition members set uniform emissions taxes and tariffs.
In the current model, each country has a single firm producing an emission-intensive good, resulting in an equal number of transboundary emissions such as carbon dioxide. The game is a three-stage coalition formation game solved by backward induction. In stage one, each country chooses its coalition membership. A coalition is deemed stable if no country has an incentive to either enter or exit the coalition (D’Aspremont et al., 1983). In stage two, each country determines the optimal emissions tax and tariff rates that maximize the coalition’s welfare. In stage three, each firm chooses non-cooperatively its profit-maximizing production level. Firms compete à la Cournot in a segmented market with positive endogenous tariffs, as opposed to a free trade setting.
The main findings indicate that the grand coalition is stable at varying levels of heterogeneity. When market sizes are sufficiently small, the grand coalition leads to environmental and welfare gains. However, as market sizes grow larger, the global agreement yields only overall welfare gains.
Working Papers
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This paper uses a static three-country model of environmental cooperation with trade to analyze the stability of partial and global International Environmental Agreements among environmentally heterogeneous countries. Strong incentives to free-ride and challenges in enforcing international environmental agreements make international cooperation a difficult task. In the context of international trade, governments face a trade-off between enforcing higher taxes to cooperatively reduce emissions and paying higher tariffs on exports when acting noncooperatively. Diamantoudi et al. (2018) demonstrated that stable coalitions among homogeneous countries are larger and provide significant welfare gains compared to the basic model without trade.
The objectives of this paper are: (i) To determine whether environmental cooperation among heterogeneous countries results in environmental gains, welfare gains, or both; (ii) To identify which cooperative scenarios will emerge in a stable environmental coalition to exploit these gains; and (iii) To capture the effect of heterogeneity in environmental damages on the stability of these environmental coalitions. Cooperation entails that countries belonging to the same coalition choose the same emissions tax rate.
In the proposed model, each country has a single firm that produces a homogeneous emission-intensive good while generating an equal number of transboundary emissions, such as carbon dioxide. Firms compete à la Cournot in a segmented market where each firm faces market-specific demands rather than a shared global market demand. The game is a three-stage static coalition formation game solved by backward induction, with firms’ profit-maximizing production levels, governments’ emissions tax rates, and coalition membership being selected given exogenous tariffs. A coalition is deemed stable if no country has an incentive to join or leave the coalition (D’Aspremont et al., 1983).
The main findings demonstrate that the grand coalition remains stable across various levels of environmental damage heterogeneity while generating environmental and welfare gains, under certain conditions. However, at higher levels of heterogeneity, the stability of the grand coalition becomes more fragile and increasingly sensitive to exogenous tariffs.
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This paper examines unilateral Carbon Border Adjustments (CBAs) in a two-country trade model with varying environmental damage parameters. It assesses the impacts of myopic and farsighted CBAs on global welfare and emissions, comparing them with a basic trade model with endogenous tariffs. With farsighted CBAs, the government’s welfare optimization problem and the resulting emissions taxes consider Ex-ante the potential for carbon adjustments. In the myopic case, environmental taxes initially ignore the potential for such adjustments, but these are imposed subsequently.
The objectives are to: (i) examine if unilateral CBAs generate environmental gains, welfare gains, or both; (ii) determine if CBAs can facilitate convergence of environmental standards among heterogeneous countries; and (iii) evaluate the potential of CBAs to incentivize cooperation while capturing the effects of environmental damage heterogeneity on the likelihood of cooperation.
The model features two countries, each with a single firm producing an emission-intensive good and generating transboundary emissions. In stage one, each country selects an emissions tax that maximizes its welfare. The country with the highest emission tax unilaterally imposes a border adjustment on imports. In stage two, each firm independently chooses its profit-maximizing output.
In contrast to the model with bilateral tariffs, the simulations reveal that farsighted CBAs produce environmental and overall welfare gains under certain conditions, and result in higher emissions taxes in both countries. Conversely, myopic CBAs without retaliation provide a greater opportunity for cooperation, regardless of the degree of heterogeneity. Myopic CBAs with retaliation can outperform the case without retaliation in terms of collective welfare under specific conditions.