PermitReduc

Abstract:

This project aims at the modeling of non-strategic mutual dependences of large economic unions due to environmental policy in an intertemporal general equilibrium. The environmental policy of large open economies is linked by the terms of trade. A typical application of the model are the international economic effects caused by the divergent climate policies of the enlarged European Union and the United States: While the EU has to reduce the emission allowances issued in the years to come in order to comply to Kyoto targets, the US have not approved the Kyoto Protocol. In contrast to the US, the EU is an economic union of countries with very different economic conditions – the growth rates of the new member states are more than twice as high as in the former member states and the new member states aim to catch up economically. We integrated this difference in per capita income and the catching-up process in a two-country, two-region two-sector OLG model. This model focuses on the economic competitiveness of the enlarged EU, as measured by the external terms of trade. The dynamics of the terms of trade are influenced by the catching up growth process and the terms of trade influence the capital accumulation both in the EU and the US.