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Transboundary Pollution, Trade Liberalization and Environmental Taxes

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Author Info

  • Baksi, S.
  • Ray Chaudhuri, A.

    (Tilburg University, Tilburg Law and Economics Center)

Abstract

In a bilateral trade framework, we examine the impact of tariff reduction on the optimal pollution tax and social welfare when pollution is transboundary. Strategic considerations lead countries to distort their pollution tax in the non-cooperative equilibrium. Trade liberalization changes the distortion, and consequently the pollution tax and welfare, in ways that depend on the extent to which pollution is transboundary. We find that when the pollution damage parameter is sufficiently small (large), bilateral tariff reduction always decreases (increases) the pollution tax, irrespective of the value of the transboundary pollution parameter. However, when the pollution damage parameter takes intermediate values, bilateral tariff reduction decreases the pollution tax if and only if the transboundary pollution parameter is sufficiently large (or even sufficiently small, in certain cases). Moreover, with pollution being transboundary, the impact of trade liberalization on welfare is non-monotonic and concave. The greater the extent to which pollution crosses borders, the more likely is trade liberalization to reduce welfare.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2008-033.

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Date of creation: 2008
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Handle: RePEc:dgr:kubtil:2008033

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Web page: http://www.tilburguniversity.nl/tilec/

Related research

Keywords: Transboundary pollution; Strategic trade; Bilateral tariff reduction; Pollution tax;

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References

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  1. Benarroch, Michael & Thille, Henry, 2001. "Transboundary pollution and the gains from trade," Journal of International Economics, Elsevier, vol. 55(1), pages 139-159, October.
  2. Burguet, Roberto & Sempere, Jaume, 2003. "Trade liberalization, environmental policy, and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 25-37, July.
  3. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
  4. Krutilla, Kerry, 1991. "Environmental regulation in an open economy," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 127-142, March.
  5. Copeland, Brian R. & Taylor, M. Scott, 1999. "Trade, spatial separation, and the environment," Journal of International Economics, Elsevier, vol. 47(1), pages 137-168, February.
  6. Josh Ederington & Jenny Minier, 2000. "Is Environmental Policy a Secondary Trade Barrier? An Empirical Analysis," Econometric Society World Congress 2000 Contributed Papers 1507, Econometric Society.
  7. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
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Cited by:
  1. Hassan Benchekroun & Halis Murat Yildiz, 2009. "Free Trade, Autarky And The Sustainability Of An International Environmental Agreement," Departmental Working Papers 2009-10, McGill University, Department of Economics.
  2. Horn, Henrik, 2009. "The Burden of Proof in National Treatment Disputes and the Environment," CEPR Discussion Papers 7316, C.E.P.R. Discussion Papers.
  3. Horn, Henrik, 2011. "The burden of proof in trade disputes and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 15-29, July.

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