Emission Targets, Comparative Advantage and Trade: A New Reading of David Ricardo

The paper represents a new reading of the traditional Ricardian theory of comparative advantages to tackle current challenges of environmental and climate policy. In the style of David Ricardo, it demonstrates that international trade is a positive-sum game in a twogoods, two-countries world where CO2 emission targets constrain the production possibilities. Extending the number of goods produced and allowing for transportation costs does indeed question the tradability of a number of goods as in the classical Ricardian world. However, the main findings still apply that international trade extends the consumption possibilities while furhter enabling policy makers to achieve their CO2 emission targets. This simple framework is a useful tool to show that the outcome does not depend on the CO2 pricing method or the price of CO2 certificates in both countries. The mutual benefit of international trade depends, however, on restraining CO2 emissions according to the targets set by the Paris Agreement, since the level of CO2 emissions is the scarce factor of production in the model.