Climate change and trade in a globalized world

Graduation date: 2015Environmental sustainability and economic growth is at the forefront of international policy discussions. There is no question that climate change is happening, but also that countries all around the world aspire to continued economic growth. When it comes to climate change, scientists agree that increased carbon dioxide (CO₂) emissions in the atmosphere from human activity contribute to the current process of global climate change. Regarding economic growth, International Economics taught us that when countries engage in international trade, these countries benefit in terms of increased overall welfare, ceteris paribus. Finding additional avenues that would further stimulate growth in international trade, causing further increases in welfare, could be valuable. In this context, this dissertation examines the following research question: Could global standards of living continue to improve in the presence of global climate change and international trade resistance? This question will be addressed in this dissertation in two parts. \ud Addressing the first part of the research question in chapter two, this dissertation uniquely employs the theoretical and empirical tool known as the directional distance function to investigate the possibility of a global carbon dioxide (CO₂) market. The goal is to reduce or stabilize emissions without hindering global Real Gross Domestic Product (RGDP), and to achieve a uniform global price for CO₂, accomplishing environmental and economic global goals. First, this chapter looks at the Law of One Price for CO₂ and estimates shadow prices of CO₂ across countries. A joint production model with one desirable output and one undesirable output is presented. Drawing upon data from 141 countries spanning 18 years and exploiting the duality between the directional distance function and this production model, the parameters of a quadratic directional distance function are then estimated which yield country level shadow prices of CO₂. Results suggest an average country level price of $719.33 per metric ton of CO₂. Based on the relative shadow prices, a hypothetical CO₂ global market is simulated to investigate whether reduced emissions are possible without hindering RGDP. Simulation results suggest that it is possible for global emissions to stabilize while global RGDP increases, achieving environmental and economic global goals. \ud The second part of the research question is investigated in chapter three by uniquely employing Data Envelopment Analysis (DEA) techniques to estimate Johansen's Capacity Utilization notion with the goal of examining resistance to trade across trading partners. A trade resistance model is presented, where trade barriers are (undesirable) inputs used in the production of the (undesirable) output, trade resistance. Drawing upon United States manufacturing industries trade data, the impact that each trade barrier has on trade resistance is assessed. Results suggest that U.S. port logistics are the most limiting trade barrier, followed by the distance between trade partners, the U.S. imposed tariffs, and the trading partner's imposed tariffs