Coordinating global trade and environmental policy: The role of pre-existing distortions

This dissertation attempts to investigate the importance of pre-existing distortions in the analysis of trade and environmental policy in a multi-country context. To that end, a global computable general equilibrium (CGE) model is developed to more accurately capture pre-existing tax distortions across countries and the way in which they interact with trade and environmental policies. Special attention is paid to the role of the labor market, which has been shown to be a source of costly interaction effects for both trade and environmental policies. In simulations of trade liberalization and of coordinated trade and environmental policy, results indicate that careful attention to second best considerations can alter results produced by models that are absent these features. This model is used to explore a number of alternative carbon tax schemes in conjunction with global trade liberalization. In further simulations, it is shown that coordinated trade and environmental policy reform could potentially be used to help break the current impasse between developed and developing countries over international climate policy.