Imperfect Competition, Border Carbon Adjustments, and Stability of a Global Climate Agreement

Soham Baksi and Amrita RayChaudhuri
Authors registered in the RePEc Author Service: Amrita Ray Chaudhuri

Journal of the Association of Environmental and Resource Economists, 2025, vol. 12, issue 3, 527 - 564

Abstract: We analyze the stability of a global climate agreement to mitigate greenhouse gas emissions when countries choose pollution taxes simultaneously and strategically. Emissions arise from the production of a good, which is traded across countries with segmented markets that are imperfectly competitive. We find that, while a global climate agreement involving all countries is unstable under autarky, a move from autarky to free trade may stabilize the grand coalition between countries. As markets become more competitive, it becomes more likely that the global climate agreement is stable, and the environmental and welfare gains from global cooperation also become larger. Further, we introduce a border carbon adjustment (BCA) mechanism consisting of an import tariff set equal to the pollution tax differential across countries. We find that allowing countries to use a BCA tends to destabilize an otherwise stable grand coalition.

Date: 2025
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Working Paper: Imperfect Competition, Border Carbon Adjustments, and Stability of a Global Climate Agreement (2020)
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