North–South asymmetry, unilateral environmental policy and carbon tariffs

Liming Hong, Wei Huang, Sajid Anwar and Xiaofeng Lv

Pacific Economic Review, 2023, vol. 28, issue 2, 241-266

Abstract: This paper focuses on the potential impact of a carbon tariff on carbon emissions, North–South trade and welfare. We use a North–South trade model, where North implements a unilateral environmental policy on domestic carbon‐intensive industries followed by a carbon tariff on imports from South. Unlike the existing studies, we allow asymmetry in clean production technologies and marginal environmental damage. We show that a carbon tariff can reduce the global carbon emission via the use of a more advanced clean production technology in North, which increases the firm profit and welfare. However, improvement in welfare of North is associated with a decrease in global trade flows and welfare of South. We find that, in the presence of asymmetry in clean production technologies between North and South, a carbon tariff introduced by the North can eliminate carbon leakage, but the exports of South decrease below the pre‐unilateral environmental policy level and hence North can potentially use a carbon tariff for trade protectionism in the name of reducing carbon leakage in South.

Date: 2023
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