Interactions between trade and environmental policies in the Czech Republic

The Czech Republic is obliged to implement pollution charges in accordance with the EU environmental policy. The charges may affect international competitiveness of the country, since they are applied to the domestically produced, but not to the imported commodities. We investigate how such environmental taxation of six main pollutants affects the Czech competitiveness. Using computable general equilibrium modeling with bottom-up approach, we consider a small-open economy with endogenous unemployment and ten types of taxes. A distinction between taxes on products and taxes on production is essential for analysis of a fiscal policy. Emissions reduction is possible in our model either through substitution with less polluting inputs, or a reduction of output, or through technical abatement. The last channel for emission reduction is ignored by other studies. The results show that the imports should not be affected by the tax reform, except for coal. Exports will increase in the non-energy-intensive and the biomass industries, but it will decrease in the chemical, the coal, and the metal industries. The overall effect on the trade balance is slightly negative. We conclude that investments in energy-saving technologies are necessary in order to preserve international competitiveness.