The dissertation studies the impact of the climate policy in the context of international trade.The first chapter of the dissertation studies how the initial allocation of permits could be determined in an emissions trading system when the location choice of firms is possible. In the traditional theory, the distribution of permits does not matter in the equilibrium decisions because the relocation of firms or industries to countries with less stringent regulation is not considered. The theoretical model of the first chapter emphasizes the importance of permit allocation when the relocation of firms can hurt the welfare of regulated economy and hence the government may try to prevent the welfare loss by allocating more permits to firms whose relocation can hurt the economy more. Then, using the data from the EU emissions trading system (EU ETS) the theoretical predictions are confirmed empirically. Historical emissions, the level of profits, and fixed costs are the key components in the initial permit allocation as economic theory predicts. However, estimation results show that the industrial competitiveness, measured in net imports, does not show a significant influence on the permit allocation.The second chapter revisits the pollution haven hypothesis with the data from the EU emissions trading system. Traditional tests for the pollution haven hypothesis have used general environmental spending measures such as pollution abatement cost, which does not properly contain marginal cost implications. The second chapter provides the reason why permit price interacted with emissions intensity is a better measure for the regulatory stringency theoretically. Empirical results using the data from the EU emissions trading system add supporting yet weak evidence that environmental regulations has some modest adverse impact on international trade. The reason for using the emissions trading system as an emissions reduction tool is that it guarantees the cost-effectiveness under certain conditions. The third chapter examines the cost-effectiveness of the permit market by empirically testing the independence property between the initial permit allocation and the post-trading equilibrium decisions in the EU ETS. It is argued that in the case of the EU ETS transaction cost is the most relevant factor that can hurt the independence property. Theoretical model based on Stavins (1995) predicts how transaction cost affects the post-trading equilibrium. Empirical tests show that the EU ETS is in the process of settling down; first two years of the EU ETS show a significant dependence between the permit allocation and the equilibrium decisions, but the dependence vanishes as the system matures over time.
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