Abstract
We investigate whether trade sanctions against outsiders can foster climate cooperation in self-enforcing international environmental agreements if outsiders retaliate. We find a threshold effect: In small coalitions incentives to be a coalition member decrease whereas in large coalitions they increase. Thus, trade sanctions can be an effective tool in climate policy only after a sufficiently large climate coalition has already been formed. Even if larger stable coalitions are achieved with trade sanctions, implications for global welfare can be adverse, because additional trade distortions trade off with the environmental gains. We identify the USA and Europe as essential members of stable coalitions if outsiders retaliate.
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