North-south interactions in the presence of trade in environmental permits: a structuralist investigation

Arslan Razmi

Cambridge Journal of Economics, 2016, vol. 40, issue 2, 541-574

Abstract: This article develops a structuralist framework to analyse a world where production requires emission permits. International agreements bind Northern output whilst leaving room for the South under the principle of ‘common but differentiated responsibilities’. Act I considers the effects of reducing Northern output through tighter emission regulations. In the short run, traditional structuralist results such as a negative effect on Southern terms of trade and accumulation follow. In the long run the impact of Northern regulation is ‘bottled up’ within that region. This latter property vanishes once Act II allows for the creation of international permit markets. Permit trade relaxes the Northern output constraint whilst also establishing a channel through which the North directly influences Southern permit prices. The result in the short run is to reverse the effects of tighter Northern regulation on relative Southern terms of trade and accumulation, which now increase. In the long run, international permit trade leads to increased variability in the (1) global distribution of capital in response to tighter Northern regulation, and (2) intensity of Northern emissions in response to tighter Southern regulation. Thus, globalised permit exchanges generate new trade-offs between the global distribution of capital and environmental efficiency.

Date: 2016
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