Games of Climate Change with International Trade

We analyse games of greenhouse gas emission reduction in which the emissions and the emission reduction costs of one country depend on other countries’ emission abatement. In an analytically tractable model, we show that international trade effects on costs and emissions can either increase or decrease incentives to reduce emissions and to cooperate on emission abatement; in some specifications, optimal emission reduction is unaffected by trade. We therefore specify the model further, calibrating it to larger models that estimate the costs of emission reduction, trade effects, and impacts of climate change. If trade affect the total emission reduction costs, but not the marginal emission reduction costs, cooperation is more difficult than in the case without trade effects. If trade affects both marginal and total emission reduction costs, cooperation becomes easier. Carbon leakage does not affect our qualitative insights, although it does change the numbers.