Journal
JOURNAL OF THE ASSOCIATION OF ENVIRONMENTAL AND RESOURCE ECONOMISTS
Volume 4, Issue 3, Pages 927-957Publisher
UNIV CHICAGO PRESS
DOI: 10.1086/693562
Keywords
Abatement; Emissions; Home market effect; International trade; Pollution haven
Categories
Funding
- Swedish Research Council
- Jan Wallander's and Tom Hedelius's Research Foundation
- Mistra's ENTWINED program
- KAKENHI [16K03652, 26220503]
- Grants-in-Aid for Scientific Research [16K03652, 26220503, 17H00986, 15H03348] Funding Source: KAKEN
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This paper uses a monopolistic competitive framework to study the impact of trade liberalization on local and global emissions. We focus on the interplay of asymmetric emission taxes and the home market effect and show how a large-market advantage can counterbalance a high emission tax, so that trade liberalization leads firms to move to the large high-tax economy. Global emissions decrease when trade is liberalized in this case. We then simulate the model with endogenous taxes. The larger country, which has the advantage of the home market effect, will be able to set a higher Nash emission tax than its smaller trade partner yet still maintain its manufacturing base. As a result, a pollution haven will typically not arise in this case as trade is liberalized. However, global emissions increase as a result of international tax competition, which underscores the importance of international cooperation as trade becomes freer.
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