Climate and international trade policies when emissions affect production possibilities

In this paper, we develop a model of international trade and climate change in which emission discharges arising from production have a feedback effect on national production sectors by impacting upon effective factor endowments. With this context, the objectives are, first, to provide a general characterization of Pareto-efficient climate and trade policies and, second, to examine the possibility – starting from non-Pareto-efficient equilibria – for Pareto-improving environmental policies. We provide conditions under which several particular reforms of carbon taxes are welfare improving.

► We model the impacts of climate change on the production sectors of economies. ► We determine conditions for Pareto-efficient carbon and trade policies. ► We identify conditions under which strictly Pareto-improving reforms of specific carbon taxes exist.