Environmental taxes and international spillovers: The case of a small open economy

Abstract

In the existence of trade interaction, a sub-global climate change policy can generate externality, which can cause competitiveness issues for the producers in compliant regimes. However among compliant regions, a small economy also receives a significant spillins effect when a large economy takes some regulatory actions that affect, particularly, the world prices of traded commodities. This externality can have notable impacts on the efficiency and pollution abatement opportunities of the small compliant regime with a trivial converse effect. In some cases, these impacts on the efficiency and emissions abatement can be in opposite directions. We capture these findings by incorporating two protection polices (i.e., border tax adjustment and free emissions allocations to emission-intensive and trade exposed industries) in a multi-region analytical and numerical general equilibrium modeling framework. These results convey that the large economies hold leading strategic positions towards a cooperative global climate change movement because of their policies' influences on the small economies.