Efficient International Environmental Agreements for Correlated Transnational Pollutants in the Presence of Free Trade of Goods and International Transfers

We examine numerous settings in which large strategic nations make environmental policies in the presence of international trade and form coalitions that aim to mitigate global or continental transnational pollution. We show that every nation has incentives to internalize all emission externalities and neutralize terms-of-trade effects in various settings in which all nations belong to coalitions, the coalitions are completely interconnected and the international transfers promoted within all coalitions are proportionally equitable. Although many efficient international arrangements feature coalitions with fewer than the total number of nations, all efficient arrangements yield payoffs identical to those produced by the grand coalition.