Trade and transboundary pollution: quantifying the effects of trade liberalization on CO₂ emissions

I consider a multi-country trade model in which a subset of firms emit transboundary pollution as a by-product of production. Consumers are harmed by these emissions, creating a role for government intervention. Theoretically, the effects of trade liberalization on the level of pollution and aggregate welfare are ambiguous -- they depend on values of country-specific pollution disutility parameters. I use real-world data to estimate trade costs and to recover values for these disutility parameters that are consistent with the Nash--Walras equilibrium predicted by the model. In counterfactual exercises, I investigate the effects of changing trade costs on the aggregate level and distribution of pollution as well as the welfare of each country. These experiments suggest concern regarding the effect further trade liberalization has on the level of firm-generated pollution and that agreements like the Kyoto Protocol can be effective even when governments behave strategically.