Conference Agenda

Climate change poses severe risks to vulnerable regions causing substantial economic damages worldwide. While economic damages to European economies from climate risks within Europe are projected to be lower, the globalisation of markets and supply chains allows impacts to spread across borders and unfold in countries distant from their origin. We study the implications of this phenomenon for Austria, a small open economy with strong trade linkages both within and outside Europe. Employing a global Computable General Equilibrium (CGE) model, we analyse two types of impacts at a global scale until 2050: sea level rise and heat-induced labour productivity losses, both with low and high levels of adaptation. With low adaptation levels macroeconomic effects outside Europe are higher by a factor of 5 compared to high adaptation. This transmits to Austrian trade flows: imports from outside Europe decline by 2.2% with low adaptation compared to 0.7% with high adaptation; extra-European exports decline by 1.2% with low and by 0.5% with high adaptation levels. While intra-European trade can substitute for some of the lost trade flows, economic damages for the Austrian economy remain. Welfare losses are twice as large for low compared to high adaptation levels. The results thus provide an incentive to support adaptation in distant but connected countries, as this can reduce domestic welfare losses too.

In the European Union, climate policies are largely harmonized, while capital taxation is under the jurisdiction of each member state. In a setting that closely resembles the policy architecture in the EU, we analyze how a benevolent supranational authority should optimally design a permit trading system, given that countries use capital taxes to finance local public goods and influence the allocation of capital and permits. We find that public goods can be provided at inefficiently high or low levels, depending, among other factors, on whether a country imports or exports capital. In a symmetric equilibrium, all countries provide too little of the public good. We find that, given the tax competition incentives of governments, the supranational authority should either grandfather or auction all permits. Under grandfathering, there is no rationale to deviate from the first-best rule relating to the emissions cap. Under auctioning, however, the cap should be adjusted either upwards or downwards, depending on whether tax rates are strategic substitutes or complements and whether countries provide too little or too much of the public good.

We analyze gradual coalition formation in the canonical model of International Environmental Agreements (IEA). Focusing on pure strategies, as previous literature has done, the multiplicity of equilibria problem observed in the one-shot game is exacerbated, yielding a multiplicity of potential gradual coalition formation paths. However, the outcome of the process can be determined: a small coalition if coalitions are reversible, the grand coalition if they are irreversible, and intermediate sizes when they are partially reversible. Introducing mixed strategies, we show that the literature has ignored one of the Nash Equilibria of the one-shot game analyzed in Barrett (1994). Considering mixed strategies and gradual coalition formation, the equilibrium in completely mixed strategies selects a unique path from the many possible paths under pure strategies. This path is close to the one with the fastest coalition expansion under pure strategies, although slightly slower. As we argue that mixed strategies are the best way to analyze IEA, the results explain the success of the Montreal Protocol and other agreements that have followed a gradual formation process.

After decades of gradual tariff cuts, few conventional trade barriers remain. As a result, the focus of new trade agreements has shifted from further tariff concessions to harmonizing other trade-affecting regulations between countries. We build a theoretical model to analyze how such deepening trade integration affects environmental regulation, lobbying activity, and welfare in a strategic two-country setting. We first derive analytical expressions for the optimal regulatory levels under various trade scenarios. Our results show strong incentives for international regulatory cooperation, but the effects can be welfare-reducing in the presence of politically influential firms. Then, we consider a model endogenizing lobbying efforts. Deep trade integration tends to increase lobbying relative to a conventional shallow agreement and can provide incentives for lobbies to explicitly coordinate, which is always detrimental to welfare. Committing to perfect regulatory harmonization as opposed to partial convergence can improve welfare by weakening the influence of lobbies.