Carbon Policy and the Structure of Global Trade

28 Pages Posted: 18 Jan 2018

See all articles by Edward J. Balistreri

Edward J. Balistreri

Iowa State University

Christoph Böhringer

University of Oldenburg

Thomas Rutherford

University of Wisconsin - Madison

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Date Written: January 2018

Abstract

Alternative perspectives on the structure of international trade have important implications for the evaluation of climate policy. In this paper, we assess climate policy in the context of three important alternative trade formulations. First is a Heckscher‐Ohlin model based on trade in homogeneous products, which establishes the traditional neoclassical view on comparative advantage. Second is an Armington model based on regionally differentiated goods, which is a popular specification for numerical simulations of trade policy. Third is a Melitz model based on monopolistic competition and firm heterogeneity. This heterogeneous‐firms framework is adopted in many contemporary theoretic and empirical investigations in international trade. As we show in this paper, the three alternative trade formulations have important implications for the assessment of climate policy with respect to competitive effects for energy‐intensive production (and hence carbon leakage) as well as the transmission of policy burdens across countries.

Keywords: carbon leakage, competitiveness, heterogeneous firms

Suggested Citation

Balistreri, Edward J. and Böhringer, Christoph and Rutherford, Thomas, Carbon Policy and the Structure of Global Trade (January 2018). The World Economy, Vol. 41, Issue 1, pp. 194-221, 2018, Available at SSRN: https://ssrn.com/abstract=3104250 or http://dx.doi.org/10.1111/twec.12535

Edward J. Balistreri (Contact Author)

Iowa State University ( email )

260 Heady Hall
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Christoph Böhringer

University of Oldenburg

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

Thomas Rutherford

University of Wisconsin - Madison ( email )

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