On strategic interactions of climate policy and international trade.

Climate change is an international problem in several dimensions. Beside theirrelevance of the spatial origin of emissions for regional climate impacts, abatementpolicies have an international dimension as well. The rise in costs for domesticproducers of energy intensive goods, induced by unilateral mitigation policies suchemission trading or carbon taxation, potentially endangers domestic competitivenessand might cause an increase in foreign emissions (the so-called 'carbon leakage'problem). A potential instrument to counteract leakage and level the playing eldbetween domestic and foreign producers are border tax adjustments (BTA).We examine in a general equilibrium framework the strategic interactions ofclimate and trade policies, if the two issues are unilaterally linked by one regions.We set up a model with two sectors and two regions. Every region sets an optimalclimate and trade policy from their point of view.The model shows that including terms of trade eects from climate policies mayease the standard prisoners dilemma problem in mitigating greenhouse gases. Wefurther expect that BTA is eective in combating the leakage problem but sets onlyminor incentives for a reduction in foreigns emission intensity in production.