In discussing trade policy in the context of climate change, some people are quick to argue that trade might have to be restricted. After all, trade involves transportation, and unfortunately, transportation is an important source of carbon emissions. In addition, there is growing support for carbon border adjustments, a tariff on carbon-intensive imports (e.g. Elliot et al. 2010, Mehling et al. 2019, Farrokhi and Lashkaripour 2020, Kortum and Weisbach 2020).
Yet, by facilitating locations to switch specialisation, trade may also be a powerful way to mitigate the negative economic effects of global warming. The underlying logic of this claim is straightforward. The impact of rising temperatures depends both on location (e.g. southern Canada or equatorial Africa) and occupation (e.g. farmer or service worker). As such, climate change can be thought of as a shock to comparative advantage. Faced with such a shock, locations are bound to respond by changing their specialisation patterns.
Needless to say, the strength of trade as an adaptation mechanism to climate change depends on the ease of switching production across sectors. Moving out of farming may not be so helpful if the rest of the economy suffers from low productivity. And if trade is costly, goods have to be sourced locally, limiting the scope of switching to other activities. If adaptation through changing specialisation is difficult, we may see a rise in migration instead.
To assess the role of trade, specialisation, and migration in responding to climate change, in Conte et al. (2020) we develop a high-resolution, two-sector dynamic model of the globe with costly trade and migration. The model includes both the effect of temperature on productivity and the effect of production on emissions, the carbon stock, and rising temperatures. After discretising the world into 64,000 one degree by one degree grid cells, we simulate the model forward for several centuries. Our assessment assumes fossil-fuel-intensive economic growth, consistent with a 1,200 gigatons of carbon (GTC) increase in the stock of carbon and a 3.7°C increase in global temperature by the end of the 21st century. This corresponds to the so-called Representative Concentration Pathway (RCP) 8.5 used by the Intergovernmental Panel on Climate Change (IPCC).