Title

Can Trade Be Good for the Environment?

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2016

Journal or Book Title

Journal of Public Economic Theory

DOI

10.1111/jpet.12176

Abstract

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 fallsunder trade relative to autarky. When countries use quotas/permits to regulate pollution, there isno 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 higherthan 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.

JEL Classification

F18, H23, Q56

Comments

This is a working paper of an article from Journal of Public Economic Theory (2016), doi: 10.1111/jpet.12176.