Environmental regulation and eco-industry trade: Theory and evidence from the European Union

Carl Gaigne and Lota Tamini

No 18-09, Working Papers SMART from INRAE UMR SMART

Abstract: In this paper, we theoretically and empirically study the impact of environmental taxation on trade in environmental goods (EGs). Using a trade model in which the demand for and supply of EGs are endogenous, we show that the relationship between environmental taxation and demand for EGs follows a bell-shaped curve. Above a cutoff tax rate, a higher pollution tax rate can reduce the bilateral trade of EGs because there are too many low-productivity suppliers of EGs. Our empirical results confirm our main findings using data regarding the EU-27 countries. We also theoretically and empirically show that environmental taxation has a monotonically positive impact on the extensive margin of trade. Furthermore, we show that if countries apply an environmental tax rate equals to the “optimal” tax rate, 4.03% (e.g., the tax rate maximizing international trade of EGs), then trade in EGs would experience an increase of 22 percentage points.

Keywords: environmental goods; international trade; environmental taxation (search for similar items in EconPapers)
JEL-codes: F12 F18 Q56 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018
New Economics Papers: this item is included in nep-env and nep-int
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https://ageconsearch.umn.edu/record/280620 (application/pdf)

Related works:
Working Paper: Environmental regulation and eco-industry trade: Theory and evidence from the European Union (2018)
Working Paper: Environmental regulation and eco-industry trade: Theory and evidence from the European Union (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rae:wpaper:201809

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