Carrots and sticks in trade and climate policies

Tariffs or consumption tax hikes used in isolation engender consumption-based emission spillovers. A combination of these two instruments, if well designed, can offset these spillovers and would result in a zero-sum or win-win welfare outcome. The approach suggested here either strengthens deterrence against free-riders via stricter tariff sanctions or promotes climate cooperation via trade liberalization. The choice of trade and climate policy instruments depends, inter alia, on the relative strength of Home versus Foreign price responsiveness of demand.