Trade and commodity taxes as environmental instruments in an open economy

PurposeIn a simple reciprocal dumping model of trade, this study scrutinizes the strategic role of trade and commodity taxes as environmental instruments when consumption of an imported product generates pollution. The results suggest that for sufficiently small values of the marginal disutility from pollution, commodity taxes can be preferred over import tariffs, and compared to the case of trade policies, free trade can be welfare dominating even for higher values of the marginal disutility from pollution when commodity taxes are used strategically as environmental instruments.Design/methodology/approachThe authors employ a reciprocal dumping model of trade.FindingsA sufficiently high marginal disutility from pollution (or sufficient asymmetries between the countries in terms of their marginal disutility from pollution) may jeopardize bilateral trade, especially if countries are given the option to set tariffs freely for imported goods (consumption of which generate environmental pollution). For sufficiently weak transboundary pollution and sufficiently low marginal disutility from pollution, (1) both Nash trade and domestic policies may prove to be helpful in addressing consumption-based pollution, and (2) it is possible to show in such a case that Nash domestic policies may be preferred over Nash trade policies, especially when both transboundary pollution and the trading partner's marginal disutility from pollution are sufficiently low.Originality/valueThe novel contribution of this paper is (1) to capture asymmetries among trading partners in terms of how much they account for environmental pollution when deciding on their (domestic/trade) policy measures and (2) to focus on environmental degradation that is caused by final consumption of a product imported from a trading partner.

RECIPROCAL DUMPING AND ENVIRONMENTAL POLICES

In a reciprocal dumping model of trade we analyse the effect of environmental policy reform on welfare in the presence of unemployment and repatriated profits. Pollution quota, used by the government in each country, restricts the local production and reduces the social harmful pollution. However, this quota is a barrier of trade which inhibits the employment and consumers surplus benefit. Bearing in mind this, both countries agree an infinitesimal and proportionate uniform reduction in pollution quota. In both cases global welfare will increase if marginal disutility of pollution is larger than the cost for abating pollution. The effect on each country will depend on the market size and marginal technological costs. Under the same conditions, when both countries agree harmonisation in pollution quotas the global welfare increase but the effect on the welfare of each country will be different.

RECIPROCAL DUMPING AND ENVIRONMENTAL TAXES

This paper calculates the optimal tax of the emission of polluting agents in oligopolistic possess and under conditions of the reciprocal dumping, in which the firms count on the appropriate technology to decrease the pollution and can decide the amount of emissions generated. In this model the optimal tax mainly depends on the amount of the marginal disutility to pollute, as well as the abatement cost.

Together at Last: Trade Costs, Demand Structure, and Welfare

We show that relaxing the assumption of CES preferences in monopolistic competition has surprising implications when trade is restricted. Integrated and segmented markets behave differently, the latter typically exhibiting reciprocal dumping. Globalization and lower trade costs have different effects. The former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; when demands are less convex than CES, globalization raises whereas lower trade costs reduce firm output. Finally, calibrating gains from trade is harder. Many more parameters are needed, while import demand elasticities typically overestimate the true elasticities, and so underestimate the gains from trade.