Navigating North–South Environmental Policy Under Trade Frictions, Carbon Neutrality and Livelihood Targets

ABSTRACT

In the context of escalating global challenges, including trade frictions and supply chain disruptions, countries face the complex task of aligning environmental regulation with economic objectives. Against this backdrop, this paper develops a theoretical North–South trade model to examine the trade‐offs involved in simultaneously safeguarding environmental quality, maintaining international competitiveness and preserving consumer welfare. Distinct from the existing literature, the analysis explicitly incorporates North–South heterogeneity and highlights the role of consumer welfare in shaping policy outcomes. Three principal findings emerge. First, the optimal environmental tax is lower than the Pigouvian benchmark, reflecting the need to mitigate adverse effects on consumer welfare. Second, tariff barriers can function as a strategic instrument to support the implementation of more stringent domestic environmental taxes, thereby facilitating international policy coordination. Third, asymmetries between the North and South play a critical role in determining the scope for environmental policy cooperation, with policy stringency contingent on factors such as technological capacity and the magnitude of environmental damages. Overall, the findings underscore the importance of carefully designed environmental policies that reconcile economic and ecological objectives within an interdependent global framework.