Is trade liberalization conducive to the formation of climate coalitions?

Abstract

The present paper analyzes the impact of moving from autarky to international trade on the formation of self-enforcing international environmental agreements with Nash coalitions. With and without trade, stable coalitions consist of two countries at most—in contrast to the model that portrays coalitions as Stackelberg leaders (Eichner and Pethig in Public Econ 102:37–50, 2013). Although the coalition steps up its mitigation effort in the transition from autarky to trade, world emissions rise and thus constitute a ‘green paradox of trade liberalization.’ Opening the borders not only increases global pollution, but also reduces the aggregate welfare of all countries.