Social welfare, climate change and strategy selections for developing countries

Liao Yiqin, Chen Xun

School of Economics and Business Administration, Chongqing University, 400044, Shapingba Chongqing China.

This paper introduces external effect of carbon emission in social welfare function, constructs two-stage trade game among three countries, analyzes partially equilibrium output of the three countries and then discusses the influences of different carbon tax policies on social welfare in each country. The study shows it is more effective for developing countries to adopt strategies about founding free trade area and domestic carbon tax collection, up to a higher social total welfare lever, when they face carbon border tax adjustments (BTAs) from developed countries under Nash game conditions. By further studying, the efficiency of domestic carbon tax policy depends on the carbon intensity relation of each country; a higher relative intensity of carbon abroad decreases the negative external effect value caused by the carbon emissions.