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

Carl Gaigne and Lota Tamini

No 280620, Working Papers from Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2)

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: International; Relations/Trade (search for similar items in EconPapers)
Pages: 41
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/files/wp18-09.pdf (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:ags:inrasl:280620

DOI: 10.22004/ag.econ.280620

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