Toward a Theory of International Environmental Agreements and Trade

Most theoretical work on the formation of IEAs has implicitly assumed that trade relationships between potential signatories do not exist. Our work extends the standard participation game model to explicitly consider the impact of trade on the size and effectiveness of an IEA in a world of short-sighted, self-interested countries (negotiators) that live up to their bargains. As the impact of trade can be positive or negative, we decompose it into three components: scale effects; smoothing effects; and leakage effects. We show that leakage leads to a larger IEA with lower individual abatement targets, while scale effects and smoothing effects tend to lead to a smaller agreement with greater individual abatement targets. Moreover, of the three effects, only leakage has the potential to induce full cooperation when it does not exist under autarky. Thus, leakage has a surprisingly positive effect on the negotiation of an IEA. 1