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Environmental Policy and Firm Selection in the Open Economy

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  • Udo Kreickemeier
  • Philipp M. Richter

Abstract

In this paper, we analyse the effects of a unilateral change in an emissions tax in a model of international trade with heterogeneous firms. We find a positive effect of tighter environmental policy on average productivity in the reforming country through reallocation of labour towards exporting firms. Domestic aggregate emissions fall, due to both a scale and a technique effect, but we show that the reduction in emissions following the tax increase is smaller than in autarky. Moreover, general equilibrium effects through changes in the foreign wage rate lead to a reduction in foreign emissions and, hence, to negative emissions leakage in case of transboundary pollution.

Suggested Citation

  • Udo Kreickemeier & Philipp M. Richter, 2019. "Environmental Policy and Firm Selection in the Open Economy," Discussion Papers of DIW Berlin 1807, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1807
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    References listed on IDEAS

    as
    1. Udo Kreickemeier & Philipp M. Richter, 2014. "Trade and the Environment: The Role of Firm Heterogeneity," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 209-225, May.
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    More about this item

    Keywords

    Trade and environment; Heterogeneous firms; Unilateral environmental policy; Emissions leakage;

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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