Emissions Trading and International Trade

We explore the effects of international trade in goods and emissions permits on global warming and welfare in a two-country, two-good, general equilibrium model. International commodity trading does not reduce greenhouse gas (GHG) emissions if the comparative advantage stems from differences in per-capita emission allowances; however, it may reduce them if the comparative advantage is also based on differences in technologies. International emissions trading may not mitigate global warming. Whether it improves welfare would depend on how it affects the terms of trade in goods and global warming. A country with a large amount of per-capita emission allowances may import permits and suffer from deterioration in the terms of trade in goods.