Skip to main content
Article
Can trade be good for the environment?
Economics Working Papers (2002–2016)
  • Harvey E. Lapan, Iowa State University
  • Shiva Sikdar, Keele University
Document Type
Working Paper
Publication Date
10-1-2014
Working Paper Number
WP #14032, September 2014
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.
Disciplines
File Format
application/pdf
Length
24 pages
Citation Information
Harvey E. Lapan and Shiva Sikdar. "Can trade be good for the environment?" (2014)
Available at: http://works.bepress.com/harvey-lapan/9/