Forging a Global Environmental Agreement Through Trade Sanctions on Free Riders?

35 Pages Posted: 25 Jun 2015

See all articles by Thomas Eichner

Thomas Eichner

University of Siegen - School of Economic Disciplines

Rudiger Pethig

University of Siegen - School of Economic Disciplines; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 24, 2015

Abstract

This paper studies the formation of self-enforcing global environmental agreements in a world economy with international trade and two groups of countries that differ with respect to fuel demand and environmental damage. It investigates whether the signatories’ threat to embargo (potential) free riders secures all countries’ participation in the agreement. Resorting to numerical analysis, we find that an embargo may be unnecessary, ineffective or even counterproductive - depending on the degree of asymmetry and other parameters. On some subset of parameters, the embargo stabilizes the otherwise unstable global agreement, but the threat of embargo is not credible. However, in some of these cases credibility can be restored by suitable intra-coalition transfers.

Keywords: embargo, trade, asymmetry, free rider, fuel demand, climate damage

JEL Classification: F180, Q500, Q580

Suggested Citation

Eichner, Thomas and Pethig, Rudiger, Forging a Global Environmental Agreement Through Trade Sanctions on Free Riders? (June 24, 2015). CESifo Working Paper Series No. 5402. Available at SSRN: https://ssrn.com/abstract=2622397

Thomas Eichner

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Rudiger Pethig (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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