ABSTRACT
This chapter addresses some of the issues involving international trade, transboundary pollution and environmental cooperation among heterogeneous countries. It analyses how the extent of heterogeneity and freer trade affect the sustainability of such cooperation. The chapter examines the role played by border tax adjustments (BTAs) in sustaining cooperation, where countries imposing a higher pollution tax on their domestic firms charge the BTA on imports of a polluting good from countries imposing a lower pollution tax. These issues gain importance in light of the ongoing intergovernmental negotiations on climate change conducted under the aegis of the UNFCCC. The chapter presents basic model without any BTA and derives its equilibrium under full cooperation and non-cooperation in the one shot game. It provides the repeated game associated with the one shot game, and analyses the incentives of the countries to cooperate in the absence of a BTA. The chapter also analyses the impact of implementing a BTA on cooperation.
