Free Trade and Global Warming: A Trade Theory View of the Kyoto Protocol

This paper demonstrates how several important results in environmental economics, true under mild conditions in closed economies, are false or need serious amendment in a world with international trade in goods. Since the results we highlight have framed much of the ongoing discussion and research on the Kyoto protocol, our viewpoint from trade theory suggests a re-examination may be in order. Specifically, we demonstrate that in an open trading world, but not in a closed economy setting: (1) unilateral emission reductions by the rich North can create self-interested emission reductions by the unconstrained poor South; (2) simple rules for allocating emission reductions across countries (such as uniform reductions) may well be efficient even if international trade in emission permits is not allowed; and (3) when international emission permit trade does occur it may make both participants in the trade worse off and increase global emissions. _______________________________________________________________________ Copeland: Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, B.C. Canada V6T 1Z1 Tel: 604-822-8215; email: [email protected] Taylor: Department of Economics, University of Wisconsin-Madison, 6448 Social Science bldg. 1180 Observatory Dr., Madison, WI, 53706. Tel: 608-263-2515; email: [email protected]; web: www.ssc.wisc.edu/~staylor/ Acknowledgments: We have received many helpful comments from participants in seminars at Florida International University, University of Illinois, University of Michigan, Southern Methodist University, University of Wisconsin, UC Santa Barbara, UC Santa Cruz, the NBER Summer Institute (1999), and the ESF International Dimension of Environmental Policy workshop (2000). We also gratefully acknowledge grants from the SSHRC (Copeland) and the NSF, WAGE, and IES (Taylor).