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Can Trade Be Good for the Environment?

Harvey Lapan and Shiva Sikdar

ISU General Staff Papers from Iowa State University, Department of Economics

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.

Date: 2016-01-01
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Related works:
Journal Article: Can Trade Be Good for the Environment? (2017) Downloads
Working Paper: Can Trade be good for the environment? (2014) Downloads
Working Paper: Can trade be good for the environment? (2014) Downloads
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