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Tariffs and Environmental Taxes in the Presence of Environmental R&D

Listed author(s):
  • Tsung-Hsiu Tsai

    ()

    (National University of Kaohsiung)

  • Kuang-I Tu

    ()

    (National Formosa University)

  • Jiunn-Rong Chiou

    ()

    (National Central University)

Registered author(s):

    Abstract It is generally held that trade liberalization results in less-stringent environmental regulations, which suggests that policies regulating trade and the environment are positively correlated. This paper examines whether this monotonic relationship still holds true when pollution-reducing environmental research and development (ER&D) is undertaken by the home firm in a duopoly market. The link between tariffs and environmental taxes is examined under three possible scenarios—namely, when the home government has: (i) a tariff instrument only; (ii) an environmental tax instrument only; and (iii) both regulatory instruments, to correct for distortions relating to trade and the environment. We find that if it is not possible to abate pollution completely through ER&D, then the monotonic relationship between tariffs and environmental taxes is sustained. However, if it is possible to fully abate pollution through ER&D, then the optimal tariff (environmental tax) may not increase monotonically with taxes (tariffs). When both environmental taxes and tariffs are employed, these two policies may be strategic substitutes. A positive relationship between tariffs and environmental taxes may not be applicable.

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    File URL: http://link.springer.com/10.1007/s10640-014-9773-0
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    Article provided by Springer & European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 60 (2015)
    Issue (Month): 3 (March)
    Pages: 413-431

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    Handle: RePEc:kap:enreec:v:60:y:2015:i:3:d:10.1007_s10640-014-9773-0
    DOI: 10.1007/s10640-014-9773-0
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