Environmental and Resource Economics

, Volume 47, Issue 4, pp 495–520 | Cite as

Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy

  • Birgit Bednar-FriedlEmail author
  • Karl Farmer
  • Andreas Rainer


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 


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Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  • Birgit Bednar-Friedl
    • 1
    • 2
    Email author
  • Karl Farmer
    • 1
  • Andreas Rainer
    • 2
  1. 1.Department of EconomicsUniversity of GrazGrazAustria
  2. 2.Wegener Center for Climate and Global ChangeUniversity of GrazGrazAustria

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