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Abstract

The effects of a unilateral cut in emissions are analyzed in a dynamic two-country model. Two (intermediate) goods are produced, one of which uses the fossil fuel. These inputs are traded and combine to produce a final good. The effect of a cut in fossil fuel use by a bloc (e.g. Annexure 1 countries in the Kyoto Protocol) depends on whether the fuel is priced at marginal cost or above. In the latter case a "green paradox" may appear. The paper's contribution lies in analyzing the dynamics and trade implications of the unilateral action.