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Trade uncertainty, emission cap and firm pollution

Author

Listed:
  • Fan, Haichao
  • Guo, Guangyuan
  • Liu, Yu
  • Wang, Huanhuan

Abstract

This study investigates the effects of reducing trade policy uncertainty (TPU) on firms’ production and pollution dynamics under different extents of environmental regulation stringency. We develop a trade model with heterogeneous firms subject to different regulatory pressures. Our calibration shows that reduced TPU boosts firm output by 6%, which persists even under stricter environmental regulations. Meanwhile, the emission cap control prominently reduces emissions and emission intensity. By constructing a firm-level TPU reduction shock following the U.S. granting of permanent normal trade relations to China, we empirically test our model’s predictions using Chinese data. Consistently, we find that while firms in both environmentally regulated and non-regulated zones increase output to similar extents, only those in Two-Control Zones with stringent sulfur dioxide (SO2) emission controls reduce their total emission intensity through decreased fossil fuel use, desulfurization, and increased investment in pollution abatement.

Suggested Citation

  • Fan, Haichao & Guo, Guangyuan & Liu, Yu & Wang, Huanhuan, 2025. "Trade uncertainty, emission cap and firm pollution," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:jeborg:v:229:y:2025:i:c:s0167268124004281
    DOI: 10.1016/j.jebo.2024.106814
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade policy uncertainty; Environmental regulation; Emission cap; Emission intensity;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • 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
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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