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Green Technology Transfers and Border Tax Adjustments

  • Alain-Désiré Nimubona
  • Horatiu Rus

    (Department of Economics, University of Waterloo)

We develop a two-country general equilibrium model of foreign assistance tied to environmental clean-up in the presence of transboundary pollution. The recipient country generates pollution as a by-product in the production of a ‘dirty’ good, which it consumes as well as exports to the donor country. In contrast to the literature which typically treats aid as a monetary transfer, we assume that foreign aid consists in a transfer of environmental technology that lowers the cost of public clean-up in the recipient country. We highlight the fact that the marginal propensities to consume the polluting good in the donor and recipient countries are driving the terms of trade effect at work in our model. The environmental and welfare outcomes are influenced by the direct, terms of trade and abatement effects of the transfer. We show that such tied aid may be Pareto improving if the clean-up effect of the foreign aid is strong enough to compensate for the donor’s monetary and terms of trade losses. We finally analyze the effects of the green transfer combined with an appropriate border tax adjustment. Contrary to intuition, we find that green technology transfers and border tax adjustments are not complements.

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Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1102.

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Length: 41 pages
Date of creation: May 2011
Date of revision: May 2011
Handle: RePEc:wat:wpaper:1102
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  1. Brett, Craig & Keen, Michael, 2000. "Political uncertainty and the earmarking of environmental taxes," Journal of Public Economics, Elsevier, vol. 75(3), pages 315-340, March.
  2. Kemp, Murray C & Kojima, Shoichi, 1985. "Tied Aid and the Paradoxes of Donor-Enrichment and Recipient-Impoverishment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 721-29, October.
  3. Panos Hatzipanayotou & Sajal Lahiri & Michael S. Michael, 2000. "Can Cross-Border Pollution Reduce Pollution?," CESifo Working Paper Series 360, CESifo Group Munich.
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  5. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "On the tying of aid to tariff reform," Journal of Development Economics, Elsevier, vol. 54(2), pages 479-491, December.
  6. Takumi Naito, 2003. "Pareto-improving Untied Aid with Environmental Externalities," Journal of Economics, Springer, vol. 80(2), pages 161-169, October.
  7. Hicks, Robert L. & Parks, Bradley C. & Roberts, J. Timmons & Tierney, Michael J., 2010. "Greening Aid?: Understanding the Environmental Impact of Development Assistance," OUP Catalogue, Oxford University Press, number 9780199582792, July.
  8. B. Mak Arvin & Parviz Dabir-Alai & Byron Lew, 2006. "Does Foreign Aid Affect The Environment In Developing Economies?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 31(1), pages 63-87, June.
  9. Yazid Dissou, 2009. "Pollution Control, Competitiveness, and Border Tax Adjustment," Working Papers 0911E, University of Ottawa, Department of Economics.
  10. Sumeet Gulati, 2008. "Free trade and the burden of domestic policy," Canadian Journal of Economics, Canadian Economics Association, vol. 41(3), pages 817-837, August.
  11. Takumi Haibara, 2009. "Environmental Funds, Public Abatement, and Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(2), pages 167-177, October.
  12. Schweinberger, A G, 1990. "On the Welfare Effects of Tied Aid," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 457-62, May.
  13. Panos Hatzipanayotou & Sajal Lahiri & Michael Michael, 2008. "Cross-Border Pollution, Terms of Trade, and Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 327-345, November.
  14. Schweinberger, A.G. & Woodland, A.D., 2008. "The short and long run effects of tied foreign aid on pollution abatement, pollution and employment: A pilot model," Journal of Environmental Economics and Management, Elsevier, vol. 55(3), pages 310-325, May.
  15. B. Mak Arvin & Byron Lew, 2009. "Foreign aid and ecological outcomes in poorer countries: an empirical analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 16(3), pages 295-299.
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