IDEAS home Printed from https://ideas.repec.org/p/ekd/008007/8102.html
   My bibliography  Save this paper

Environmental Policy Instruments and Uncertainties Under Free Trade and Capital Mobility

Author

Listed:
  • Shreekar Pradhan
  • J. Scott Holladay
  • Mohammed Mohsin
  • Shreekar Pradhan

Abstract

We analyze the properties of environmental policy instruments in the face of uncertainty for an economy that is open to international trade and capital mobility (open economy). We incorporate three static environmental policy instruments which could be inefficient: cap-and-trade, pollution tax and emission intensity standard in our model and evaluate their properties under an exogenous temporary productivity shocks to simulate business cycles and an exogenous temporary abatement cost shock to represent reduced costs of clean inputs (for example cheap natural gas due to fracking). We then compare impacts on welfare, pollution levels, outputs, consumption, investment, supply of labor and trade flows in the economy. To date this literature has either focused on either economies under autarky or in a static modeling framework with a focus on strategic interaction among agents and thus ignore an additional channel of international trade and capital mobility that may smooth the intensity of business cycle shock or abatement cost breakthrough. We develop a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model where we incorporate international trade and capital mobility. We evaluate long term properties and use DYNARE to evaluate short term (dynamic) properties. Our results suggest that the preferred environmental policy instrument varies with the source of uncertainty. The cap-and-trade policies are best suited to smooth the business cycle while pollution taxes and intensity targets are most effective in the face of abatement cost shocks. We find that the magnitude of the productivity shock's impact on the economy swamps the impact of an abatement cost shock. This suggests that a cap-and-trade policy, which performs best in the face of productivity shocks, should be the preferred policy instrument in most cases. In our model, calibrated to Canadian data, a one standard deviation productivity shock has nearly an order of magnitude larger impact than a one standard deviation abatement cost shock.

Suggested Citation

  • Shreekar Pradhan & J. Scott Holladay & Mohammed Mohsin & Shreekar Pradhan, 2015. "Environmental Policy Instruments and Uncertainties Under Free Trade and Capital Mobility," EcoMod2015 8102, EcoMod.
  • Handle: RePEc:ekd:008007:8102
    as

    Download full text from publisher

    File URL: http://ecomod.net/system/files/Shreekar_Pradhan_Ecomod2015.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kathy Baylis & Don Fullerton & Daniel H. Karney, 2014. "Negative Leakage," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 51-73.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
    4. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    5. McAusland, Carol, 2008. "Trade, politics, and the environment: Tailpipe vs. smokestack," Journal of Environmental Economics and Management, Elsevier, vol. 55(1), pages 52-71, January.
    6. Fabio Antoniou & Panos Hatzipanayotou & Phoebe Koundouri, 2012. "Second Best Environmental Policies under Uncertainty," Southern Economic Journal, Southern Economic Association, vol. 78(3), pages 1019-1040, January.
    7. Carolyn Fischer & Richard D. Morgenstern, 2006. "Carbon Abatement Costs: Why the Wide Range of Estimates?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 73-86.
    8. Edward Manderson & Richard Kneller, 2012. "Environmental Regulations, Outward FDI and Heterogeneous Firms: Are Countries Used as Pollution Havens?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 51(3), pages 317-352, March.
    9. Shrestha, Ratna K., 2001. "The choice of environmental policy instruments under correlated uncertainty," Resource and Energy Economics, Elsevier, vol. 23(2), pages 175-185, April.
    10. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
    11. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October.
    12. John Parsons & Luca Taschini, 2013. "The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 55(1), pages 71-86, May.
    13. Holland, Stephen P., 2012. "Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 375-387.
    14. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future.
    15. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
    16. Josh Ederington & Arik Levinson & Jenny Minier, 2005. "Footloose and Pollution-Free," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 92-99, February.
    17. Quirion, Philippe, 2005. "Does uncertainty justify intensity emission caps?," Resource and Energy Economics, Elsevier, vol. 27(4), pages 343-353, November.
    18. Josh Ederington & Jenny Minier, 2003. "Is environmental policy a secondary trade barrier? An empirical analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 36(1), pages 137-154, February.
    19. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    20. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
    21. Carolyn Fischer & Garth Heutel, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 197-210, June.
    22. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
    23. Onno Kuik & Reyer Gerlagh, 2003. "Trade Liberalization and Carbon Leakage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 97-120.
    24. McAusland, Carol & Millimet, Daniel L., 2013. "Do national borders matter? Intranational trade, international trade, and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 65(3), pages 411-437.
    25. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
    26. Silva, Emilson C.D. & Zhu, Xie, 2009. "Emissions trading of global and local pollutants, pollution havens and free riding," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 169-182, September.
    27. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
    28. Clemens Heuson, 2010. "Weitzman Revisited: Emission Standards Versus Taxes with Uncertain Abatement Costs and Market Power of Polluting Firms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(3), pages 349-369, November.
    29. Winston Harrington & Richard D. Morgenstern & Peter Nelson, 2000. "On the accuracy of regulatory cost estimates," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 297-322.
    30. Brian R. Copeland & M. Scott Taylor, 1994. "North-South Trade and the Environment," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 755-787.
    31. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
    32. William A. Pizer, 2005. "The case for intensity targets," Climate Policy, Taylor & Francis Journals, vol. 5(4), pages 455-462, July.
    33. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
    34. 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.
    35. A. Denny Ellerman & Ian Sue Wing, 2003. "Absolute versus intensity-based emission caps," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages 7-20, December.
    36. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    37. Kellenberg, Derek K., 2009. "An empirical investigation of the pollution haven effect with strategic environment and trade policy," Journal of International Economics, Elsevier, vol. 78(2), pages 242-255, July.
    38. Quirion, Philippe, 2010. "Complying with the Kyoto Protocol under uncertainty: Taxes or tradable permits?," Energy Policy, Elsevier, vol. 38(9), pages 5166-5173, September.
    39. Uribe, Martin, 2002. "The price-consumption puzzle of currency pegs," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 533-569, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Canadian Economy; Energy and environmental policy; Business cycles;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ekd:008007:8102. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Theresa Leary). General contact details of provider: http://edirc.repec.org/data/ecomoea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.