International trade and the negotiability of global climate change agreements

Abstract

This paper examines the incentives for individual countries to engage in global negotiations to reduce carbon emissions in order to prevent global warming. To reduce carbon emissions a country reduces consumption of its own good. The direct effect of reducing its own consumption is that consumption declines and with it utility. However, reducing carbon emissions also lowers global temperatures and that increases utility. The trade-off between these two effects determines the incentive for countries to reduce carbon emissions. We find that larger countries are more likely to participate because a given percentage reduction in output will result in a larger reduction in global temperatures. Longer time horizons also lead to greater willingness to participate. The presence of international trade makes carbon reduction agreements more likely because reducing the output of your own (export) good has a positive terms of trade effect which reduces the cost of output reduction.