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We investigate the displacement effects of unilateral phase-out-of-coal policies in a stylized two-country model with coal- and gas-fired electricity generation in an international emissions trading scheme. In the basic policy scenario, electricity markets are national and one country bans coal while the emissions cap remains unchanged. The allocative displacement effects are strongly asymmetric: the coal-banning country suffers a welfare loss, the other country is better off, and aggregate welfare declines. Furthermore, the permit price decreases, while the electricity price rises in the unilaterally acting country and declines in the other country. If all countries would phase out coal, the effects would be symmetric and all countries would lose. We then extend the analysis to the cases (i) when the unilateral coal ban is combined with a moderate cut of the emissions cap (as recently suggested in an EU Directive) and (ii) when we allow for international trade in electricity. Compared to the basic unilateral policy, in these cases, the total welfare costs tend to be smaller and some tend to be shifted from the unilaterally acting country to the other one.

In a two-country economy, we analyze how tax competition differs from the standard all-Nashian tax competition, if one or both countries are Kantians in Roemer’s sense. Kantians are shown to choose a higher tax rate than Nashians for any given tax rate of the other country, which indicates that they seek to mitigate the (Nashian) race to the bottom. In case of symmetric countries, the all-Kantian tax competition turns out to be efficient and the inefficient race to the bottom is weakened in economies with a Nashian and a Kantian. That confirms the intuitive idea that countries following the Kantian categorical imperative avoid or at least soften the socially undesirable impact of (Nashian) self-interest. We also investigate the incentives of opportunistic countries to choose Nashian or Kantian behavior out of self-interest and find that either both governments choose to behave as Kantians or that—under different conditions—the robust Nashian self-interest supersedes Kantian moral principles such that the inefficient all-Nashian tax competition results.

The policy of purchasing fossil fuel deposits for preservation is an alternative to the demand‐side climate policies that predominate in practice and in professional studies. This paper analyzes the deposit purchase approach and compares it to the standard demand‐side policy in a model with international trade and non‐cooperative governments that account for the effects of their policies on equilibrium prices. We investigate how the two regimes differ with respect to their equilibrium allocations and, in particular, with respect to the countries’ mitigation effort and welfare. If countries are symmetric, mitigation is stronger in the demand‐side than in the supply‐side regime and the transition from the latter to the former is welfare enhancing for all countries. If countries have different endowments of deposits in a two‐country economy, the country with higher extraction costs does not purchase deposits for preservation, and the country with lower extraction costs is better off with the supply‐side than with the demand‐side policy. Finally, we consider the case of combined policies and find surprisingly that no equilibrium in pure strategies exists, when heterogeneous countries apply both policy instruments. Politiques climatiques mondiales ascendantes : preservation des gisements de combustibles fossiles par opposition a la limitation de la consommation de carburant. La politique d’achat de gisements de combustibles fossiles aux fins de preservation represente une alternative aux politiques climatiques axees sur la demande predominant a la fois dans la pratique mais aussi dans les etudes professionnelles. Cet article analyse l’approche fondee sur l’achat de gisements et la compare a la politique standard axee sur la demande dans un modele de commerce international et de gouvernements non cooperatifs prenant en compte les effets de leurs politiques sur les prix d’equilibre. Nous avons recherche en quoi les deux regimes differaient relativement a leur repartition de l’equilibre, et notamment relativement a l’effort d’attenuation et a la protection sociale. Si les pays sont symetriques, l’attenuation est plus prononcee dans un systeme axe sur la demande comparativement a un systeme axe sur l’offre, et la transition du second au premier systeme permet d’ameliorer la protection sociale pour tous les pays. Dans une economie a deux pays differemment dotes en matiere de gisements, le pays ayant les couts d’extraction les plus eleves n’achete pas de gisements a des fins de preservation, tandis que le pays ayant les couts d’extraction les moins eleves se retrouve en meilleure posture dans une politique axee sur l’offre plutot que sur la demande. Pour terminer, nous examinons le cas des politiques combinees et, etonnamment, nous constatons qu’il n’existe aucun equilibre en matiere de strategies pures lorsque des pays heterogenes appliquent les deux moyens d’action.

This paper studies waterbed effects in a stylized model of carbon regulation, in which all countries participate in an emissions trading scheme (ETS), implement national emissions caps on non-ETS emissions, and support green electricity. Since a change in some country's ETS emissions is exactly offset by opposite changes in the other countries' ETS emissions (waterbed effect), allocative disturbances in one country affect all other ETS countries. We analyze the allocative displacement effects on inputs, outputs, prices and trade that a country, say country A, triggers at home and in the other ETS countries, when it unilaterally increases its support of green electricity via raising its feed-in tariff. ETS emissions turn out to decline in country A and to rise in the other countries. Another remarkable waterbed effect is that country A suffers a welfare loss, whereas the other countries are better off. Country A’s welfare loss is larger than it would be if there would be national ETSs instead of the joint ETS. If green electricity support takes the form of subsidies on the electricity price instead of feed-in tariffs, we get another waterbed effect: green electricity production increases in country A, but declines in the other countries. Various decarbonization indicators improve in country A, but tend to point into the opposite direction in the other countries.

In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.

In the world economy with interdependent markets for fossil fuel deposits and extracted fossil fuel, a coalition of countries may fight climate change by purchasing fossil fuel deposits for preservation. Harstad (J Polit Econ 120:77–115, 2012) has shown that the coalition’s supply-side climate policy implements the first-best. The present paper focuses on the role exploration and asymmetric information with respect to climate damage plays for the efficiency of unilateral supply-side climate policy. Under the assumption of non-strategic exploration and truthful reporting of climate damage, the deposit policy turns out to be efficient. If exploration is used strategically or the coalition misreports its climate damage, however, the deposit policy becomes inefficient.

The present paper analyzes self-enforcing biodiversity agreements (or coalitions) in a multi-country general equilibrium model. Governments split up all land in unprotected and protected land, and there are internationally traded consumption goods that use either protected or unprotected land as an input in production. Global biodiversity is increasing in aggregate protected land. The willingness-to-pay for biodiversity (conservation) is larger in the ‘rich’ North than in the ‘poor’ South. There is an international market on which governments and possibly a coalition of northern countries may demand and/or offer unprotected land for conversion into protected land. If a coalition exists, it turns out to be the only demander on that market, and its demand is increasing in coalition size. We investigate the formation of self-enforcing coalitions when governments and the coalition either take prices as given or exert market power. We find that there are no such coalitions, when external biodiversity benefits are large, but there may be self-enforcing coalitions, even large ones, if these benefits are sufficiently small. Furthermore, it is possible that the South suffers a welfare loss when a self-enforcing coalition of northern countries pays for biodiversity conservation in the South.

Oates and Schwab (J Public Econ 35:333–354, 1988) consider an economy with mobil capital and jurisdictions that suffer from local pollution. They show that welfare-maximizing jurisdictions implement the first-best, if they take prices as given and have at their disposal a capital tax and an environmental standard. Petchey (J Public Econ Theory 17:461–467, 2015) claims that the efficiency result of Oates and Schwab can be extended to a large price-influencing jurisdiction. To enable efficiency comparisons, we expand his model by a second jurisdiction with price-elastic excess supply of capital and prove that his large price-influencing jurisdiction sets an environmental standard and a capital tax that fail to be (Pareto) efficient. Thereby we clarify that and why the allocation of emissions is inefficient, in general, although the allocation rule for emissions is not.

We apply a land-use approach to biodiversity conservation (BC) by assuming that the global public good ‘biodiversity’ is positively correlated with the share of land protected by land-use restrictions against the deterioration of habitats, ecosystems, and biodiversity. The willingness to pay for BC is positive in developed countries (North), but very low in developing countries (South). Taking the no-policy regime as our point of departure, we analyze two concepts of BC: the northern countries’ financial support of BC in the South, and the coordination of northern countries’ BC efforts. In each regime, governments may either take prices as given or may act strategically by seeking to manipulate the terms of trade in their favor. Our numerical analysis yields results with unexpected policy implications. If northern countries support BC financially in the South without coordinating their actions, the protected land, biodiversity and welfare increase so slightly that this BC policy is almost ineffective. The BC concept with a Coaseian flavor—in which northern countries support BC financially in the South and coordinate their action—is efficient if governments act non-strategically. Otherwise, the concept is an ineffective BC policy instrument, because the incentives for expanding the protected land the BC policy creates are so strong that biodiversity actually becomes excessive.

This paper analyzes the competition in emissions standards and capital taxes when production causes local pollution and large jurisdictions act strategically. It is shown that emissions standard competition both with and without capital tax competition results in inefficient outcomes. The more productive jurisdiction imports capital and sets inefficiently tight emissions standards, whereas the less productive jurisdiction chooses inefficiently lax emissions standards. Adding capital tax competition improves local pollution, but exacerbates the capital distortion and the efficiency loss of emissions standard competition.

A coalition of given size fights climate change by a policy of purchasing fossil fuel deposits, and it seeks to manipulate the fuel price in its favor. Assuming that non-signatories are price takers in the fuel market, Harstad (2012) designs a policy of trading deposits that attains efficiency despite the coalition’s option to act strategically in the fuel market. The deposit transactions constituting that policy include the trade of deposits which the non-signatories would have exploited and the coalition will exploit. The present paper shows that in a proper subset of economies a simpler policy is (also) efficient that consists of deposit purchases for preservation only. In these economies the coalition is unable to raise its welfare above the level in the benchmark case of fuel price taking. In the economies, where the efficient policy requires deposit transactions for exploitation, the coalition is better off and the non-signatories are worse off than in case of price taking.

The literature on self-enforcing environmental agreements (SIEAs) focuses on de- mand-side emission-reduction policies. To our knowledge, Harstad (2012) is the only study on SIEAs, in which countries purchase fossil-energy deposits to prevent their exploitation. He finds that for any coalition size there exists a (small) subset of parameters, different for each size, such that the coalition of that size is stable. However, the comparison of Harstad's results with the prevailing demand-side SIEA analyses is hampered by major differences in the structure of the respective game models. This paper develops a game model with a deposit market and deposit purchases for preservation that is in line with some demand-side SIEA literature. It turns out that either no coalition is stable or the grand coalition is the only stable coalition. We compare the outcome of our model not only with Harstad's model but also with Eichner and Pethig's (2015) model of the formation of SIEAs in which climate policy takes the form of (demand-side) emissions taxes.

A small open economy produces a consumer good as well as renewable (green) and fossil fuel based (brown) energy. It imports fossil fuel at an uncertain price and suffers from carbon emission damages. Unregulated competitive markets are shown to be inefficient. The implied market failures are due to the agents' attitudes toward risk, to risk shifting, and the uniform price for both types of energy. Under the plausible assumptions that consumers are prudent and at least as risk-averse as the producers of brown energy, the risk can be efficiently managed by placing a tariff on fuel imports (which is equivalent to taxing carbon emissions in the model at hand) and taxing green energy. The need to tax green energy contradicts the widespread view that subsidization of green energy is an appropriate means to enhance energy security in countries depending on risky fossil fuel imports.

We investigate the performance of a consumption-based carbon tax – implemented by full border carbon adjustment – as an instrument of unilateral climate damage mitigation in a two-period two-country general equilibrium model with a finite stock of fossil fuel. The implementation of that tax in the first period reduces the first-period emissions in the taxing and non-taxing country (negative within period leakage) if income effects are sufficiently weak. Otherwise, it increases the first-period emissions in both countries (green paradox). That result contrasts with the case of a unilateral production-based carbon tax, in which the leakage rate is always positive and possibly exceeds 100%.

Itaya et al. (2014) study the conditions for sustainability and stability of capital tax coordination in a repeated game model with tax-revenue maximizing governments. One of their major results is that the grand tax coalition is never stable and sustainable. The purpose of this note is to prove that there are conditions under which the grand tax coalition is stable and sustainable in Itaya et al.'s model.

We consider a small open economy that operates a carbon emission trading scheme and subsidizes green energy. Taking cap-and-trade as given, we seek to explain the subsidy as the outcome of a trilateral tug of war between the green lobby, the brown lobby and the consumer lobby. With parametric functions we fully solve the competitive economic equilibrium and the lobbying Nash equilibrium. The rate of the green subsidy results from complementary or opposing political pressures of the three interest groups. If the brown lobby is stronger than the green one, our main results are (i) that the outcome of the three-party lobbying game is a green tax, if preferences are not green, and (ii) that green consumer preferences are necessary but not sufficient for generating a green subsidy in the lobbying game.

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.

In a multi-country model with mobile capital and global pollution this paper analyzes the stability of self-enforcing environmental agreements (IEAs) when the coalition formed by the signatory countries plays Nash. In accordance with previous environmental literature we show that there exists a unique self-enforcing IEA consisting of two or three signatory countries if emissions tax rates are strategic substitutes. However, emissions tax rates are strategic complements if the pollution is not too detrimental. In that case we find very small self-enforcing IEAs, as before, but now the socially optimal agreement among all countries may be selfenforcing as well. Special emphasis is placed on the investigation and interpretation of the conditions which render stable the grand coalition.

This paper characterizes a sub-global climate coalition’s unilateral policy of reaching a given climate damage reduction goal at minimum costs. Following Eichner and Pethig (J Environ Econ Manag, 2013) we set up a two-country two-period model in which one of the countries represents a climate coalition that implements a binding ceiling on the world’s first-period emissions. The other country is the rest of the world and refrains from taking action. The coalition can make use of production-based carbon emission taxes in both periods, as in Eichner and Pethig (J Environ Econ Manag, 2013), but here we consider consumption-based carbon emission taxes as an additional instrument. The central question is whether and how the coalition employs the consumption-based taxes along with the production-based taxes in its unilateral cost-effective ceiling policy. All cost-effective policies identified analytically and numerically consist of a mix of both types of taxes implying that there is a tax mix which is less expensive for the coalition than stand-alone consumption-based or stand-alone production-based taxes. With full cooperation both taxes are perfect substitutes (in our model), but in case of unilateral action they are imperfect substitutes, because coalition’s total welfare loss from two different but moderate distortions is smaller than that from a single but severe distortion.

This erratum corrects an error in that part of the article, which relates to the exertion of market power.

This paper focuses on carbon emissions control in a group of countries to explore the distributional incidence of mixed policies consisting of a joint emissions trading scheme (ETS) and of national emissions taxes overlapping with the ETS. Such policies impact on national welfares through both the overlapping taxes and the distribution of national emissions caps. First, we consider the polar case of an emissions tax-only policy and show that the equilibrium allocation is unaffected by the introduction of an ETS with an arbitrarily given distribution of emissions caps. Next, we analyze the distributional consequences of mixed policies. We characterize those mixed policies, including the polar cases of ETS-only and tax-only policies, which bring about the same distribution of national welfares. We also suggest two measures of the net distributional incidence of mixed policies which allow to identify winners and losers of mixed policies relative to the tax-only policy.

Policies of lowering carbon demand may aggravate instead of alleviate climate change (green paradox). In a two-period, three-country general equilibrium model with finite endowment of fossil fuel, one country enforces an emissions cap in the first or second periods. When that cap is tightened, the extent of carbon leakage depends on the interaction of various parameters and elasticities. Conditions for the green paradox are specified. All determinants of carbon leakage resulting from tightening the first-period cap work in the opposite direction when the second-period cap is tightened. Tightening the second-period cap does not necessarily lead to the green paradox.

We consider a stylized model of the hybrid CO 2 emissions control in the EU. A group of countries operates a joint emissions trading system (ETS) covering only part of each country's economy. The countries levy an emissions tax in the rest of their economy and, possibly, an additional tax in their ETS sectors. Welfare-maximizing governments are shown to lack incentives for group-efficient policies. Preexisting taxes overlapping with the ETS lead policy makers to allocate more permits to their ETS sectors than cost effectiveness would suggest. The cases of ‘small’ and ‘large’ countries exhibit significantly different efficiency implications.

The population dynamics in a food chains are derived from a sequence of short- run equilibria of an ecosystem where predator species demand prey biomass, supply own biomass to their predators and are assumed to behave as if they maximize net biomass intake. Introducing prices as scarcity indicators for the biomass of each species enables us to determine a short-run ecosystem equilibrium guided by prices. Equilibrium regimes differ with respect to their mix of zero-priced (= abundant) and positive-priced (= scarce) species. The population dynamics turn out to vary with the prevailing equilibrium regime. Our analysis yields a richer and more complex population dynamics than the traditional predator-prey dynamics of the Lotka-Volterra type.

Predator-prey relationships account for an important part of all interactions between species. In this paper we provide a microfoundation for such predator-prey relations in a food chain. Basic entities of our analysis are representative organisms of species modelled similar to economic households. With prices as indicators of scarcity, organisms are assumed to behave as if they maximize their net biomass subject to constraints which express the organisms‘ risk of being preyed upon during predation. Like consumers, organisms face a ‘budget constraint‘ requiring their expenditure on prey biomass not to exceed their revenue from supplying own biomass. Short-run ecosystem equilibria are defined and derived. The net biomass acquired by the representative organism in the short term determines the positive or negative population growth. Moving short-run equilibria constitute the dynamics of the predator-prey relations that are characterized in numerical analysis. The population dynamics derived here turn out to differ significantly from those assumed in the standard Lotka-Volterra model.

Harvesting of prey biomass is analyzed in an integrated ecological-economic system whose submodels, a predator–prey ecosystem and a simple economy, are microfounded dynamic general equilibrium models. These submodels are interdependent because the ecosystem responds to harvesting—through the reactions of optimizing individual organisms—by changing the provision of public ecosystem services to consumers. General analytical results are derived regarding the impact of harvesting policies on short-run equilibria of both submodels, on population dynamics, and on stationary states of the integrated model. A key insight is that prey biomass carries a positive ecosystem price which needs to be added as a tax mark-up to the economic price of harvested biomass to attain allocative efficiency. Further information on the dynamics is gained by resorting to numerical analysis of the policy regimes of zero harvesting, laissez-faire harvesting and efficient harvesting. It “... is a matter of weighing costs and benefits of taking action, whether the action is the “inert” one of leaving resources alone in order to conserve them, or whether it involves exploiting a resource ... for so-called material ends”. Pearce (1976, p. 320)

In an integrated economy–ecosystem model humans choose their land use and leave the residual land as habitat for three species forming a food chain. The size of habitat determines the diversity and abundance of species. That biodiversity generates, in turn, a flow of ecosystem services with public-good characteristics for human consumption. The ecosystem submodel yields (rather than assumes!) population growth functions with each species’ growth depending on the size of habitat. First the relationship between habitat and species growth (sustenance, decline and extinction) is explored. The laissez-faire economy is shown to result in an underprovision of habitat making the case for land use restrictions for nature protection. The optimal land use policy is characterized with full regard of ecosystem dynamics. Finally, labor-augmenting technical change is introduced to generate ever increasing pressure towards further habitat reductions. In the laissez-faire economy the habitat is consequently squeezed to zero in the long-run so that all species are doomed. Social optimality demands, however, to refrain from using all land for economic purposes despite ever growing labor productivity.

Predator-prey models of the Lotka-Volterra type and their refinements describe predator-prey interactions taking populations as basic units of analysis. In contrast to these macro models we derive interdependent population growth functions of a predator and a prey species from a micro ecosystem model whose basic entities are representative prey and predator organisms which behave as if they maximize their net offspring under constraints. In the short-run periods prices (scarcity indicators) coordinate and determine all biomass transactions and net offspring which directly translates into population growth and thus constitutes the dynamics of the predator-prey relations. For a specific parametric version our model offers a theoretical foundation of the ratio-dependent predator-prey model with Michaelis-Menten type functional response.

A dynamic general equilibrium model is developed for analyzing economyecosystem interactions. It includes stock-flow relations of natural resources, species populations and pollution, and it provides a microfoundation of the growth of populations. Humans and (other) species compete for natural resources and (prey) biomass. Resource stocks, pollution and populations determine public ecosystem services which in turn affect all agents in both the ecosystem and the economy. We establish a benchmark market system encompassing Lindahl markets for ecosystem services and emission markets. We also analyze a system where those two types of markets break down (laissez-faire) and propose efficiency restoring policies.

In this paper we consider a competitive economy with flows of materials from extraction via recycling to landfilling which exhibits distortions due to pollution, external landfilling costs and inefficient product design. The allocative impact of tax-subsidy policies aiming at internalizing the distortions are analyzed when the pertinent tax-subsidy rates were successively raised from zero toward their efficiency restoring levels. Promoting recyclability by greening the product design stimulates recycling as expected. But it also increases primary material extraction and – possibly – the total waste flow, and it reduces the recycling ratio.

Using a general equilibrium model where material is first extracted, then used for producing a consumption good, recycled, and finally treated to reduce environmental damage, we study efficiency-restoring policies, when one or more of the constituent markets are inactive. The material is modeled as being embodied in the output and forms an important aspect of green product design. If all markets for embodied material per unit output fail and if recycling benefit exceeds environmental damage, the policy instruments needed for green design are a tax on the consumption good supply and a subsidy on the demand for material input.

Population growth functions are fundamental tools in the study of animal and plant populations; however, they typically are chosen for mathematical convenience as opposed to being derived from individual behavior. An alternative is to start with the individuals and show how their behavior yields a population growth function. This approach is presented using a plant community wherein individuals behave as if they are maximizing the difference between energy inflow from their exposure to light and outflow from respiration. Their behavior leads to resource competition, because each plant is vying for access to light, and as plants increase their biomass or as populations increase, the competition intensifies as light exposure declines, and this impinges upon further growth. Whether the net energy obtained by the representative individual in a population is positive or negative determines whether the population as a whole increases or decreases. Conditions for a short-run equilibrium show that plant biomass is positively related to the available space and shade tolerance and negatively related to variable respiration, while carrying capacity is positively related to the available space, and negatively related to the space taken by other populations and to fixed respiration and shade tolerance.

Itaya et al. (2014) study the conditions for sustainability and stability of capital tax coordination in a repeated game model with tax-revenue maximizing governments. One of their major results is that the grand tax coalition is never stable and sustainable. The purpose of this note is to prove that there are conditions under which the grand tax coalition is stable and sustainable in Itaya et al.’s model.

We investigate the formation of global climate agreements (= stable grand climate coalitions) in a model, in which climate policy takes the form of carbon emission taxation and fossil fuel and consumption goods are traded on world markets. We expand the model of Eichner and Pethig (2014) by considering countries that are identical within each of two groups but differ across groups with respect to climate damage or fossil fuel demand. Our numerical analysis suggests that climate damage asymmetry tends to discourage cooperation in the grand coalition. The effects of fuel-demand asymmetry depend on fossil fuel abundance. If fuel is very abundant, the grand coalition fails to be stable independent of the degree of fuel demand asymmetry. If fuel is sufficiently scarce, low degrees of fuel demand asymmetry discourage cooperation whereas higher degrees of asymmetry stabilize the grand coalition.

This paper studies within a multi-country model with international trade the stability of international environmental agreements (IEAs) when countries regulate carbon emissions either by taxes or caps. Regardless of whether coalitions play Nash or are Stackelberg leaders the principal message is that the choice of caps or taxes matters. International trade and tax regulation turn out to be necessary conditions for the existence of the encompassing self-enforcing IEA, and that the latter is attained the more likely, the less severe the climate damage. Hence, cap regulation is inferior to tax regulation insofar as in case of the former there exist no large and effective self-enforcing IEAs, in particular not the encompassing self-enforcing IEA. Further results are that for the formation of encompassing self-enforcing IEAs it does not matter (much) whether climate coalitions play Nash or are Stackelberg leaders or whether fossil fuel is modeled as a consumer good or an intermediate good.

In the basic model of the literature on international environmental agreements (IEAs) ( Barrett, 1994 , Rubio and Ulph, 2006 ), the number of signatories of self-enforcing IEAs does not exceed three, if non-positive emissions are ruled out. We extend that model by introducing a composite consumer good and fossil fuel that are produced and consumed in each country and traded on world markets. When signatory countries act as a Stackelberg leader and emissions are positive, the size of stable IEAs may be significantly larger in our model with international trade. This would be good news if larger self-enforcing IEAs would lead to stronger reductions of total emissions. Unfortunately, in the presence of self-enforcing IEAs total emissions turn out to be only slightly less than in the business as usual scenario, independent of the number of signatories. We also investigate the role of international trade by comparing our free-trade results with the outcome in the regime of autarky. Our autarky model turns out to be coincident with the basic model of the literature alluded to above. We contribute to that literature by showing that in autarky the outcome of self-enforcing IEAs is also almost the same as in the business as usual scenario.

In the basic model of international environmental agreements (IEAs) (Barrett 1994, Rubio and Ulph 2006) extended by international trade, self- enforcing - or stable - IEAs may comprise up to 60% of all countries (Eichner and Pethig 2013). But these IEAs reduce total emissions only slightly compared to non-cooperation. Here we analyze the capacity of sign-unconstrained tariffs to enhance the size and performance of self-enforcing IEAs. We show that the size of stable IEAs shrinks when climate coalitions are Stackelberg leaders and set tariffs in addition to their cap-and-trade schemes. Surprisingly, these smaller IEAs reduce total emissions more effectively than the larger stable IEAs without tariffs. In the model with tariffs the signatory countries import fossil fuel and their tariff takes the form of a subsidy of fuel consumption and a tax on the production of the consumption good.