Can Trade Be Good for the Environment?

We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.     

Strategic Environmental Policies and the Gains from Trade Liberalization

The literature on strategic environmental policy has not fully addressed welfare effects of trade liberalization from autarky. In a reciprocal market model of duopoly with transboundary pollution, we study how reductions in transport costs and import tariffs affect the Nash‐equilibrium welfare of an environmental policy game as compared to any initial state including autarky. We show three patterns of gainfulness of trade depending on the interaction between marginal damage from pollution and the degree of transboundary pollution.     

Inter‐regional competition,comparative advantage and environmental federalism

In this paper, we compare endogenous environmental policy setting with centralized and decentralized governments when regions have comparative advantages in different polluting goods. We develop a two‐region, two‐good model with inter‐regional environmental damages and perfect competition in product markets, where both regions produce both goods. Despite positive spillovers of pollution across regions, the model predicts that decentralization may lead to weaker or stricter environmental standards or taxes, depending on the degree of regional comparative advantage and the extent of transboundary pollution. This suggests that federalism can lead to either a “race to the bottom” or a “race to the top,” without relying on inefficient lobbying efforts or capital competition.     

Is Corporate Environmentalism Good for Domestic Welfare?

Many private firms voluntarily care about the environment and declare that their products and production processes are environmentally friendly. This paper shows that corporate environmentalism may reduce the effectiveness of government policies. A simple third‐market trade model with strategic environmental and trade policy is employed, in which an environmentally conscious domestic firm competes with a profit‐maximizing foreign firm. It is shown that even if emission taxes and export subsidies are both available, corporate environmentalism may reduce domestic welfare when pollution is transboundary. In the realistic situation where export subsidies are prohibited, welfare may fall even if pollution is local.     

The Triple Inefficiency of Uncoordinated Environmental Policies

When pollution is transboundary and there is international trade, a domestic inefficiency may arise in addition to the well‐known inefficiencies at the international level. More precisely, there will be a Nash equilibrium in which each country chooses a policy that gives it lower welfare than would otherwise be possible given the emission levels of all countries. However, there will also be a Nash equilibrium in which each country chooses tradable emission quotas as its policy instrument to achieve its desired level of emissions. In this Nash equilibrium, welfare in each country is maximised given the emission levels of all countries.     

Environmental Taxes and First-Mover Advantages

This paper studies whether governments prefer to be leaders or followers in environmental policies. To analyze this question I assume transboundary pollution and two countries that have to decide whether to set environmental taxes sequentially or simultaneously. When taxes are set sequentially an effect, denoted as the sequential setting effect, arises that raises the equilibrium taxes. I show that whether governments prefer to be leaders or followers in taxes depends on the degree to which environmental pollution spills over to trading partners. When this overspill is low enough, taxes are strategic complements and both the leader and the follower obtain greater welfare than under a simultaneous tax setting. However, the leader country obtains greater welfare than the follower. In this case, governments set taxes sequentially. When the degree to which environmental pollution spills over to trading partners is high enough, taxes are strategic substitutes and governments set taxes simultaneously. In this case, each government wants to avoid becoming the follower in taxes.     

The effects of environmental taxes and quotas on the optimal timing of emission reductions under Choquet–Brownian uncertainty

The effects of two environmental policy options for the reduction of pollution emissions, i.e. taxes and non-tradable quotas, are analyzed. In contrast to the prior literature this work endogenously takes into account the level of emissions before and after the adoption of the new environmental policy. The level of emissions is determined by solving the firm's profit maximization problem under taxes and fixed quotas. We find that the optimal adoption threshold under taxes is always larger than the adoption threshold under fixed quota, even in a setting characterized by ecological uncertainty and ambiguity – in the form of Choquet–Brownian motions – on future costs and benefits over adopting environmental policies.     

Climate Policy under Technology Spillovers

We study climate policy when there are technology spillovers between countries, as there is no instrument that (directly) corrects for these externalities. Without an international climate agreement, the (non-cooperative) equilibrium depends on whether countries use tradable quotas or carbon taxes as their environmental policy instruments. All countries are better-off in the tax case than in the quota case. Two types of international climate agreements are then studied: One is a Kyoto type of agreement where each country is assigned a specific number of internationally tradable quotas. In the second type of agreement, a common carbon tax is used domestically in all countries. None of the cases satisfy the conditions for the social optimum. Even if the quota price is equal to the Pigovian level, R&D investments will be lower than what is socially optimal in the quota case. It is also argued that the quota agreement gives higher R&D expenditures and more abatement than the tax agreement.     

Trade Liberalization and Environmental Taxation in Federal Systems

The literature on trade liberalization and environment has not yet considered federal structures. In this paper, we show how the design of environmental policy in a federal system has implications for the effects of trade reform. Trade liberalization leads to a decline in pollution taxes, regardless of whether pollution taxes are set at the federal (centralized) or local (decentralized) level, and it increases social welfare. The effect under a decentralized system is smaller than if these taxes are set by the federal government, and pollution emissions therefore decline in this case. Moreover, majority bias interacts with trade liberalization if federal taxes are used.     

DYNAMIC ENVIRONMENTAL TAXES UNDER INTERNATIONAL DUOPOLY

This paper studies a dynamic game of environmental taxes between two countries in the absence of explicit trade policies when both governments and firms act strategically. We demonstrate that the environmental tax in the steady‐state equilibrium in a dynamic environmental tax game is lower than that in a static environmental one. Therefore, the dynamic behaviour of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the beginning of policy competition, there is an increase in the optimal environmental tax. This implies that it is important to set cooperative environmental taxes in the beginning of policy competition because non‐cooperative environmental taxes in the dynamic game result in the race‐to‐the‐bottom, which does not lead to environmental improvement.     

Environmental policy and lobbying in small open economies

This paper analyzes consequences of lobby group activity for policy outcomes in economies with transboundary pollution and international environmental policies. International environmental policies are here characterized as pollution taxes determined in a negotiation between two countries. The optimal pollution taxes are characterized and comparative statics are carried out to increase the understanding of mechanisms underlying pollution taxes in the specified setup. It is found, among other things, that the presence of local lobbying may decrease, as well as increase pollution taxes - depending on, e.g. an assumption of symmetry.     

Environment,imperfect competition,and trade: Insights for optimal policy in general equilibrium

I build a two-country general oligopolistic equilibrium model, in which sectors differ in emissions and technologies, and pollution can be transboundary. I derive the optimal bilateral environmental policy for the economy as a whole, for the cases in which the environmental damage either linearly or quadratically increases in total pollution. The analysis highlights that the optimal emission tax can even be negative, and bilateral trade liberalization should be matched with either a rise or a fall in the optimal emission tax. The moments of the emission distribution and technology distribution across sectors are fundamental to implement optimal environmental policies.     

Environmental policy instruments and imperfectly competitive international trade

Policy makers, industrialists and environmentalists express concern that the imposition of tough environmental policies in some countries displaces production, and hence pollution, to countries which impose less tough environmental policies. Yet empirical studies of such impacts suggest they are small. However, these findings are derived from models in which international trade is modelled as being perfectly competitive. In this paper I model trade as imperfectly competitive with scope for strategic behavior by producers, in this case investment in capital. I show that the choice of environmental policy instrument can have a marked impact on the incentives for producers to act strategically, with environmental standards significantly reducing the incentives for strategic overinvestment relative to environmental taxes or no environmental policy at all. Whether welfare is higher using standards or taxes depends on whether producing countries are also significant consumers of the polluting product, and on whether all producing governments act to reduce emissions or only some subset of governments. To assess the quantitative significance of these theoretical results I conduct policy simulations on a calibrated model of the world fertilizer industry. These simulations show that the impact of environmental policy on strategic behaviour can be large.     

Pollution effects of free trade areas: Simulations from a general equilibrium model

Abstract

A two-factors, two-goods, three-countries general equilibrium model is developed to assess the effects of a Free Trade Area (FTA) on pollution emissions. It also makes it possible to compare the effects of a discriminating commercial policy with alternative–non discriminating–policies, such as full trade liberalization or non-discriminating protection. A theoretical model is first developed in order to take into account country-differences in factor endowment, environmental regulation, pollution abatement technology, marginal disutilities of pollution, as well as terms of trade effects. This model is subsequently calibrated and computed in accordance with empirical evidence. The main conclusion shows that the move from protection to FTA reduces world pollution emissions. A second result indicates that, in case of full trade liberalization, world pollution is further reduced.     

TRIMs, environmental taxes, and foreign investment

Various second-best policy mixes of investment measures and environmental taxes for a polluted, small open economy with foreign capital and immovable trade restrictions are examined. The optimal policy mix depends on the types of trade restrictions. When tariffs are in place, strict policies of pollution taxes and export requirements are optimal for alleviating tariff-induced consumption and production distortions. When involuntary quotas are used in lieu of tariffs, however, the optimal policy mix is a zero export requirement and Pigouvian taxes on pollution. For the case of VERs, however, the optimal policy demands export requirements and a less stringent pollution tax.
TRIMs, impôts environnementaux et investissement étranger. Ce mémoire examine certains ensembles de politiques de second-ordre portant sur l'investissement et les impôts environnementaux dans une petite économie ouverte polluée où il y a capital étranger et restrictions au commerce international. Quand on a des droits de douane en place, des politiques de fiscalité environnementale et d'exportations requises sont optimales pour corriger les distorsions aux patterns de production et de consommation engendrées par les droits de douane. Cependant quand des contingentements involontaires sont en place plutôt que des droits de douane, le mélange optimal de politiques est de ne pas requérir d'exportation mais d'imposer des taxes à la Pigou sur la pollution. Pour ce qui est des restrictions volontaires à l'exportation, le mélange optimal de politiques réclame une taxe moins forte sur la pollution accompagnée par un certain niveau d'exportation requis.     

Prices vs. quantities: Public finance and the choice of regulatory instruments

Since Montgomery [1972. Markets in licenses and efficient pollution control programs. Journal of Economic Theory 5, 395-418] and Weitzman [1974. Prices vs. quantities. Review of Economic Studies 41, 477-491], it has generally been assumed that, in a full-information setting, tradable quotas and taxes are equivalent regulatory instruments. We demonstrate that, if the government is movitated by public-finance concerns, this equivalence holds only if quotas are short lived. Moreover, the government prefers quotas with the shortest possible lifetime, or, what is equivalent in our setting, taxes.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

Trade Liberalization and Environmental Regulation on International Transportation

Incorporating pollution emissions from international transportation into a model of strategic trade and environmental policies, we investigate the effect of trade liberalization and environmental regulation on national welfare and the environment. Our model includes imperfectly competitive markets for international transportation and final products. We find that trade liberalization may reduce each country's welfare unless some level of environmental regulation on international transportation is in place. When international trade is liberalized initially, a mutual increase in the common emission tax rates may improve each country's welfare. However, when international trade is highly protected initially, imposing an emission tax may reduce welfare.     

Strategic Environmental Policy under Free Entry of Firms

With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms-of-trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes "too low," meaning that tax competition plausibly leads to "ecological dumping."     

Pollution Policy and Trade Liberalization of Environmental Goods

During the Doha Round at the World Trade Organization, reductions in trade barriers on environmental goods (EG) were put forward as a means of helping developed and developing countries alike deal with current environmental problems. We examine the potential effectiveness of such a strategy in a developing country that imports all its consumption of EG from an imperfectly competitive foreign eco-industry. We point out that trade liberalization of EG might in fact lead to less stringent pollution taxes, which can result in an actual rise in pollution levels. We then show that the environmental effectiveness objective of this trade reform can be achieved when the regulator uses quantitative abatement standards as an alternative pollution policy instrument. However, this environmental achievement comes at the expense of social welfare.