The Welfare Synergy of Bundling International Environmental Agreements with International Trade Treaties

This paper examines whether linking environmental cooperation with international trade agreements improves the welfare of the participating countries and allows countries to move closer to free trade compared with trade‐only agreements. The model is an infinitely repeated game with the threat of reversion to Nash equilibrium if an economy deviates from the cooperative agreement. It is found that such a synergy exists in a symmetric two‐country model with two goods, both emitting pollutants even when the externalities have local impact. A combination of analytic and numerical simulation analysis is used to derive the conclusions.