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On the Efficiency of Green Trade Policy


  • Ottar MÆstad



The paper derives conditions for second best environmental policy when there are foreign countries which fail to implement appropriate environmental regulations. It is shown that in such cases, efficiency in the global economy will not be achieved unless domestic environmental regulations are supplemented by trade provisions. The result is independent of whether environmental problems are local or international. Furthermore, when trade provisions are implemented, efficiency requires that domestic environmental taxes are fixed at the Pigouvian tax rate. The results imply that there is an economic rationale for regulating the trade between signatories and non-signatories of international environmental agreements. Efficient trade regulations will either take the form of trade restrictions or trade promotions, depending on whether the environmental problem is created by production or consumption activities, and whether the net import of the relevant commodity is positive or negative. It is argued that an efficient climate agreement, signed by a group of fuel-importing countries (e.g., the OECD countries), should include a subsidy on the import of fossil fuels. Copyright Kluwer Academic Publishers 1998

Suggested Citation

  • Ottar MÆstad, 1998. "On the Efficiency of Green Trade Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(1), pages 1-18, January.
  • Handle: RePEc:kap:enreec:v:11:y:1998:i:1:p:1-18
    DOI: 10.1023/A:1008283414254

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    References listed on IDEAS

    1. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-894, Supplemen.
    2. Felder Stefan & Rutherford Thomas F., 1993. "Unilateral CO2 Reductions and Carbon Leakage: The Consequences of International Trade in Oil and Basic Materials," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 162-176, September.
    3. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    4. Hoel Michael, 1994. "Efficient Climate Policy in the Presence of Free Riders," Journal of Environmental Economics and Management, Elsevier, vol. 27(3), pages 259-274, November.
    5. Golombek, Rolf & Hagem, Cathrine & Hoel, Michael, 1995. "Efficient incomplete international climate agreements," Resource and Energy Economics, Elsevier, vol. 17(1), pages 25-46, May.
    6. Barrett, Scott, 1990. "The Problem of Global Environmental Protection," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 68-79, Spring.
    7. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
    8. Carraro, Carlo & Siniscalco, Domenico, 1993. "Strategies for the international protection of the environment," Journal of Public Economics, Elsevier, vol. 52(3), pages 309-328, October.
    9. Conrad Klaus, 1993. "Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 121-135, September.
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    Cited by:

    1. Schamel, Guenter, 2003. "Welfare economics of conventional vs. alternative agriculture," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 52(7).
    2. Eggert, Håkan & Greaker, Mads, 2009. "On blending mandates, border tax adjustment and import standards for biofuels," Working Papers in Economics 422, University of Gothenburg, Department of Economics.
    3. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
    4. Sheldon, Ian & McCorriston, Steve, 2014. "Climate Policy and Border Measures: The Case of the US Aluminum Industry," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169544, Agricultural and Applied Economics Association.
    5. Maestad, Ottar, 2001. "Timber trade restrictions and tropical deforestation: a forest mining approach," Resource and Energy Economics, Elsevier, vol. 23(2), pages 111-132, April.
    6. Ian Sheldon & Steve McCorriston, 2012. "Climate policy and border tax adjustments: Might industrial organization matter?," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 9(2), pages 7-28, Julio-Dic.
    7. Ottar MÆstad, 2006. "Environmental Policy and Public Revenue with International Capital Mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(1), pages 43-58, January.
    8. Maestad, Ottar, 2007. "Allocation of emission permits with leakage through capital markets," Resource and Energy Economics, Elsevier, vol. 29(1), pages 40-57, January.
    9. Carolyn Fischer & Mads Greaker & Knut Einar Rosendahl, 2014. "Robust Policies against Emission Leakage: The Case for Upstream Subsidies," CESifo Working Paper Series 4742, CESifo Group Munich.
    10. Ottar Mæstad, 2001. "Efficient Climate Policy with Internationally Mobile Firms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 267-284, July.
    11. Lai, Yu-Bong & Hu, Chia-Hsien, 2008. "Trade agreements, domestic environmental regulation, and transboundary pollution," Resource and Energy Economics, Elsevier, vol. 30(2), pages 209-228, May.
    12. Nordström, Håkan & Vaughan, Scott, 1999. "Trade and the environment," WTO Special Studies, World Trade Organization (WTO), Economic Research and Statistics Division, volume 4, number 4.
    13. Hagem, Cathrine, 2003. "The merits of non-tradable quotas as a domestic policy instrument to prevent firm closure," Resource and Energy Economics, Elsevier, vol. 25(4), pages 373-386, October.


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