We present a two-good, two-country overlapping generations model where emissions arise from production and each country has a domestic emission permit system. When one country unilaterally reduces her cap on emissions, her output available for domestic and foreign consumption diminishes more than in the other country. With unchanged consumption expenditure shares for both goods the domestic terms of trade improve, while capital stocks decline in the reducing and less strongly in the non-reducing country. Improving terms of trade in the reducing country and falling capital stocks lead in total to welfare losses in both countries. However, if the country which unilaterally reduces her emission permits is a net creditor to the world economy and the Golden Rule applies, her own welfare loss remains below that of the non-reducing country.
Capital accumulation Emission permits Overlapping generations Terms of trade Welfare
This is a preview of subscription content, log in to check access.
Kuik O, Gerlagh R (2003) Trade liberalization and carbon leakage. Energy J 24: 97–120Google Scholar
Lipton D, Sachs J (1983) Accumulation and growth in a two-country model. J Int Econ 15(1–2): 135–159CrossRefGoogle Scholar
Obstfeld M (1989) Fiscal deficits and relative prices in a growing world economy. J Monet Econ 23: 461–484CrossRefGoogle Scholar
Ono T (2002) The effects of emission permits on growth and the environment. Environ Resour Econ 21: 75–87CrossRefGoogle Scholar
Ono Y, Shibata A (2005) Fiscal spending, relative-price dynamics, and welfare in a world economy. Rev Int Econ 13(2): 216–236CrossRefGoogle Scholar
Persson T (1985) Deficits and intergenerational welfare in open economies. J Int Econ 19(1–2): 67–84CrossRefGoogle Scholar
Proost S, Van Regemorter D (2004) Climate change policy in European countries and its effects on industry. Mitig Adapt Strategies Glob Change 9: 453–475CrossRefGoogle Scholar
Van Asselt H, Biermann F (2007) European emissions trading and the international competitiveness of energy-intensive industries: a legal and political evaluation of possible supporting measures. Energy Policy 35: 497–506CrossRefGoogle Scholar
Zee HH (1987) Government debt, capital accumulation, and the terms of trade in a model of interdependent economies. Econ Inquiry 25: 599–618CrossRefGoogle Scholar