Group for Research in Decision Analysis

International trade, imperfect competition, and the stability of international environmental agreements

Soham Baksi University of Winnipeg, Canada

We analyze the stability of international environmental agreements (IEAs) when the IEA member and non-member countries choose pollution taxes strategically. Production of a good causes transboundary pollution, and the good is traded across countries with imperfectly competitive markets. We find that, while a global IEA involving all countries is unstable under autarky, a move from autarky to free trade may stabilize the grand coalition between countries. As markets become more competitive, it becomes more likely that the global IEA is stable. Further, trade restrictions in the form of "carbon tariffs" can destabilize an otherwise stable grand coalition.

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