Self-enforcing international environmental agreements and trade: taxes versus caps

Abstract

We study self-enforcing international environmental agreements (IEAs) in a model with symmetric countries, international trade, and emission tax policy and find that the first-best global IEA may be self-enforcing. This is in sharp contrast to the known case of cap-and-trade policy in which self-enforcing IEAs have fewer signatories and fail to achieve significant improvements in welfare and damage reduction compared to global non-cooperation. We provide necessary and sufficient conditions for global self-enforcing IEAs and show, amongst other things, that they are more likely with less severe climate damage. Another result is that their determinants are similar for climate coalitions playing Nash or being Stackelberg leaders.