International Environmental Agreements and Border Tariff Adjustments

Abstract

The international climate mitigation regime, notably the Kyoto Protocol, has so far proven to be largely unsuccessful at slowing down the trend of increasing greenhouse gas emissions. Incomplete participation and the lack of any enforcing mechanism in IEAs are cited as the reason for the failure climate agreements like Kyoto. Coalition stability literature suggests the use of trade restrictions like border carbon adjustments complementary to climate policy with respect to their potential to generate greater cooperation and serve as enforcement of international environmental agreements. A variety of political, economic and legal reasons have so far prevented any meaningful use of border adjustments in conjunction with IEAs. Therefore, to assess the implications of border adjustments for participation and stability of climate coalitions, I develop a model of multilateral trade extended to climate concerns by way of domestic carbon prices and a border tariff adjustment levied on outsiders to the coalition. The model is solved analytically by allowing players to strategically optimize their carbon pricing decisions with and without the adjustment in a partial cooperation setting. Using the concept of internal and external stability, comparison between scenarios produces the result that a border tariff adjustment levied on imports unambiguously increases participation in the IEA as well as stability of larger coalitions. Further, the imposition of the border measure proves to be both credible and environmentally effective because it increases the welfare of the coalition and the world as a whole as well as reduces emissions by depressing output.

Date of Award	28 Mar 2015
Original language	English
Awarding Institution	University of Bath
Supervisor	Michael Finus (Supervisor) & Lucy O'Shea (Supervisor)