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Environmental Policy Instrument Choice and International Trade

Author

Listed:
  • J. Scott Holladay

    () (University of Tennessee)

  • Mohammed Mohsin

    () (University of Tennessee)

  • Shreekar Pradhan

    () (University of Virginia)

Abstract

Abstract We develop a dynamic stochastic general equilibrium model to understand how environmental policy instrument choice affects trade. We extend the existing literature by employing an open economy model to evaluate three environmental policy instruments: cap-and-trade, pollution taxes, and an emissions intensity standard in the face of two types of exogenous shocks. We calibrate the model to Canadian data and simulate productivity and import price shocks. We evaluate the evolution of key macroeconomic variables, including the trade balance in response to the shocks under each policy instrument. Our findings for the evolution of output and emissions under a productivity shock are consistent with previous closed economy models. Our open economy framework allows us to find that a cap-and-trade policy dampens the international trade effects of the business cycle relative to an emissions tax or intensity standard. Under an import shock, pollution taxes and intensity targets are as effective as cap-and-trade policies in reducing variance in consumption and employment. The cap-and-trade policy limits the intensity of the import competition shock suggesting that particular policy instrument might serve as a barrier to trade.

Suggested Citation

  • J. Scott Holladay & Mohammed Mohsin & Shreekar Pradhan, 2019. "Environmental Policy Instrument Choice and International Trade," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(4), pages 1585-1617, December.
  • Handle: RePEc:kap:enreec:v:74:y:2019:i:4:d:10.1007_s10640-019-00381-4
    DOI: 10.1007/s10640-019-00381-4
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    References listed on IDEAS

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    1. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2013. "First-and second-best allocations under economic and environmental uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 360-380, June.
    2. Copeland Brian R., 1994. "International Trade and the Environment: Policy Reform in a Polluted Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 44-65, January.
    3. Webster, Mort & Sue Wing, Ian & Jakobovits, Lisa, 2010. "Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 250-259, May.
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    More about this item

    Keywords

    Environmental policy; Import competition; Business cycles; Macroeconomic dynamics; Open economy;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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