Abstract

This thesis investigates the relationship between environmental cooperation and trade within heterogeneous countries. Comprising three essays, the research delves into the impact of environmental damage heterogeneity on the stability of environmental coalitions in the presence of exogenous tariffs, the effect of environmental damage heterogeneity on the stability of environmental coalitions in the presence of endogenous tariffs, and the role of unilateral Carbon Border Adjustments (CBAs) in incentivizing environmental cooperation among heterogeneous countries.
The first essay employs a static three-country model to analyze the stability of international environmental agreements among heterogeneous trading partners. The study examines the trade-offs governments face in balancing the enforcement of emissions reductions through higher taxes against the potential consequences of noncooperation in the form of higher exogenous export tariffs. The main findings demonstrate that the grand coalition can be stable across various levels of heterogeneity, while underscoring the critical role of punitive tariffs in determining coalitional stability.
Building upon these insights, the second essay introduces an endogenous solution to the static three-country model, incorporating endogenous import tariffs. The research identifies conditions under which the grand coalition remains stable, showcasing environmental and welfare gains across varying levels of heterogeneity. The study reveals that as market sizes expand, the grand coalition transitions from generating both environmental and welfare gains to primarily fostering only overall welfare gains.
The third essay shifts focus to the implementation of unilateral CBAs, exemplified by the European Union’s Carbon Border Adjustment Mechanism. Investigating the effects of CBAs in a two-country trade model with different environmental damage parameters, the study assesses their impacts on global welfare and emissions. Novel considerations include the time sensitivity of CBAs, distinguishing between farsighted and myopic approaches, and exploring the potential for retaliation in myopic CBAs. Results show that farsighted CBAs can generate environmental and welfare gains under specific conditions, while myopic CBAs without retaliation offer potential avenues for cooperation.
Collectively, these essays contribute valuable insights into the intricate interplay of environmental cooperation and trade dynamics, shedding light on the challenges and opportunities presented by free-riding behavior, enforcement challenges, and environmental damage heterogeneity in the pursuit of stable environmental coalitions.