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Can trade be good for the environment?

Lapan, H; Sikdar, S

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Authors

H Lapan



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 falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no 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 higher than 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.

Citation

Lapan, H., & Sikdar, S. (2016). Can trade be good for the environment?. Journal of Public Economic Theory, 19(2), 267-288. https://doi.org/10.1111/jpet.12176

Journal Article Type Article
Acceptance Date Dec 1, 2014
Publication Date Apr 1, 2016
Journal Journal of Public Economic Theory
Print ISSN 1097-3923
Publisher Wiley
Volume 19
Issue 2
Pages 267-288
DOI https://doi.org/10.1111/jpet.12176
Keywords environmental policy, trade
Publisher URL https://doi.org/10.1111/jpet.12176

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