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Can Trade Be Good for the Environment?

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  • HARVEY E. LAPAN
  • SHIVA SIKDAR

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.
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Suggested Citation

  • Harvey E. Lapan & Shiva Sikdar, 2017. "Can Trade Be Good for the Environment?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 267-288, April.
    • Handle: RePEc:bla:jpbect:v:19:y:2017:i:2:p:267-288
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    Cited by:

    1. Michael S. Michael & Panos Hatzipanayotou & Nikos Tsakiris, 2023. "Can small economies act strategically? The case of consumption pollution and non-tradable goods," University of Cyprus Working Papers in Economics 02-2023, University of Cyprus Department of Economics.
    2. Harvey E. Lapan & Shiva Sikdar, 2019. "Is Trade in Permits Good for the Environment?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(2), pages 501-510, February.
    3. Fabio Antoniou & Panos Hatzipanayotou & Michael S. Michael & Nikos Tsakiris, 2019. "On the Principles of Commodity Taxation under Interregional Externalities," University of Cyprus Working Papers in Economics 03-2019, University of Cyprus Department of Economics.
    4. Llop Maria, 2023. "Environmental Taxation and International Trade in a Tax-Distorted Economy," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 17(1), pages 1-12, January.

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    More about this item

    JEL classification:

    • F - International Economics
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H - Public Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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