A Framework for Integrating Climate Goals into Trade Agreements

20.04.2026 14:15 – 15:30

INSTITUTE OF ECONOMICS AND ECONOMETRICS SEMINAR

Jointly with Ahmad Lashkaripour & Homa Taheri, Indiana University

Abstract:

This paper develops a framework for integrating carbon pricing into existing international trade agreements, which traditionally have overlooked climate concerns. We start by showing that:(i) Countries benefiting most from trade agreements also generate higher trade-related emissions. (ii) National-level carbon taxes create pecuniary terms-of-trade externalities, causing the burden of carbon taxes imposed in one country to fall onto consumers elsewhere. Finding (i) indicates that contingent trade reforms that link market access to carbon pricing could effectively reduce emissions. However, due to the pecuniary externalities described by (ii), a redistribution mechanism may be necessary to equalize the tax burden internationally. To address this, we propose a Global Climate Fund to redistribute border-related carbon tax revenues. Quantitative analysis reveals that even a simple fund allocation mechanism could in-corporate carbon pricing of up to $119 per ton of CO2 within current trade regimes, achieving a 50% reduction in global emissions.

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