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Emissions leakage, environmental policy and trade frictions

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  • Holladay, J. Scott
  • Mohsin, Mohammed
  • Pradhan, Shreekar

Abstract

We develop a two-good general equilibrium model of a small open economy to decompose the effect of a country's unilateral strengthening of environmental policy on pollution emissions in the rest of the world, known as emissions leakage. We show analytically and numerically that the level of emissions leakage depends on the level of trade friction in the service sector. In the model, production in the manufacturing sector is associated with pollution emissions, and production in the service sector is clean. In a special case with free trade in manufacturing and no trade in services, no leakage occurs. Allowing for trade in services, we solve for the relationship between trade frictions in the service sector and leakage. At lower levels of service sector's trade friction, leakage from a small strengthening of environmental regulation decreases (increases) if services are imported (exported). Finally, we simulate the model, calibrating the to the Canadian economy to compare these effects’ relative sizes over a range of plausible parameter values. Leakage is about 18% lower when using trade friction levels estimated from the literature rather than assuming no trade friction in services.

Suggested Citation

  • Holladay, J. Scott & Mohsin, Mohammed & Pradhan, Shreekar, 2018. "Emissions leakage, environmental policy and trade frictions," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 95-113.
  • Handle: RePEc:eee:jeeman:v:88:y:2018:i:c:p:95-113
    DOI: 10.1016/j.jeem.2017.10.004
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    References listed on IDEAS

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    1. Elliott, Joshua & Fullerton, Don, 2014. "Can a unilateral carbon tax reduce emissions elsewhere?," Resource and Energy Economics, Elsevier, vol. 36(1), pages 6-21.
    2. Sergey V. Paltsev, 2001. "The Kyoto Protocol: Regional and Sectoral Contributions to the Carbon Leakage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 53-80.
    3. Kathy Baylis & Don Fullerton & Daniel H. Karney, 2013. "Leakage, Welfare, and Cost-Effectiveness of Carbon Policy," American Economic Review, American Economic Association, vol. 103(3), pages 332-337, May.
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    5. Joshua Elliott & Ian Foster & Samuel Kortum & Todd Munson & Fernando Pérez Cervantes & David Weisbach, 2010. "Trade and Carbon Taxes," American Economic Review, American Economic Association, vol. 100(2), pages 465-469, May.
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    Cited by:

    1. Udo Kreickemeier & Philipp M. Richter, 2019. "Environmental Policy and Firm Selection in the Open Economy," CESifo Working Paper Series 7725, CESifo Group Munich.
    2. repec:eee:eneeco:v:74:y:2018:i:c:p:535-545 is not listed on IDEAS
    3. repec:gam:jsusta:v:11:y:2019:i:10:p:2744-:d:230989 is not listed on IDEAS

    More about this item

    Keywords

    Climate change; Emissions leakage; Trade costs; Trade in services;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • F18 - International Economics - - Trade - - - Trade and Environment

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