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Free-Riding, Carbon Treaties and Trade Wars: ..

Lisandro Abrego & Carlo Perroni

CSGR Working Paper No. 09/98

July 1998



This paper uses a calibrated general-equilibrium model of North-South trade with carbon emissions to explore the strategic, open-economy implications of price and quantity based instruments for CO2 emission reduction. We compute non-cooperative environmental and trade policy equilibria and Nash bargaining outcomes in environmental policies with side payments of cash. Results show that quotas can lead to higher internalization levels in a non-cooperative zero-tariff equilibrium in comparison with emission fees. If tariffs are also chosen non-cooperatively, the form of policy instrument used affects equilibrium tariffs, with quotas leading to lower trade barriers, particularly under a regional carbon treaty.

Keywords: International Free-Riding, Carbon Treaties, Tariff Wars.