Lapan, HE and Sikdar, S (2016) Can trade be good for the environment? Journal of Public Economic Theory, 19 (2). pp. 267-288. ISSN 1467-9779

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We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.

Item Type: Article
Additional Information: This is the accepted author manuscript (AAM). The final published version (version of record) is available online via Wiley at Please refer to any applicable terms of use of the publisher.
Uncontrolled Keywords: environmental policy, trade
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HF Commerce
Divisions: Faculty of Humanities and Social Sciences > Keele Management School
Depositing User: Symplectic
Date Deposited: 07 Jun 2016 14:22
Last Modified: 12 Feb 2021 08:59

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