Abstract
Abstract The spatial unbundling of parts production and assembly currently characterizes globalization, leading to the worldwide dispersion of pollution. We consider socially optimal (cooperative) environmental taxes in a two-country model of global value chains in which the location of both parts and assembly can differ. When unbundling costs are so high that parts and assembly must colocate in the pre-globalized world, pollution is spatially concentrated, and harmonizing environmental taxes maximizes global welfare. In contrast, with low unbundling costs triggering the dispersion of parts and thus pollution throughout the world as today, harmonization fails to maximize global welfare. Similar results hold when the two countries non-cooperatively choose their environmental taxes.
Highlights
Globalization since the late twentieth century features not just declining barriers to trade and factor mobility, and the lowering of costs for coordinating activities within organizations
Desirable environmental policies may drastically change before and after the current globalization characterized by the spatial unbundling of production processes
18 An increase in tN has a positive effect on tax revenues and a negative effect on the consumer surplus, which cancel each other
Summary
Globalization since the late twentieth century features not just declining barriers to trade and factor mobility, and the lowering of costs for coordinating activities within organizations. One interested in the need for policy coordination (not just simple harmonization) may question whether socially optimal taxes coincide with noncooperative taxes We show that this is more likely to hold before the second unbundling than in the globalized world. The second unbundling, makes the location of parts more sensitive to environmental taxes and tax competition leads to equilibrium tax rates different to the socially optimal tax rates We can relate these findings to the experience of countries in the European Union (EU). Arbolino et al (2018) analyze the diffusion process of environmental policies and find that achievements of the environmental policy objectives of one country converged to the corresponding performance of the other country within the EU 15 from 2000 to 2014 These studies suggest that harmonization was dominant between member states with similar characteristics (EU 15) and/or in periods covering years prior to the second unbundling (1970–1990).. Environmental policy is not a sole determinant of comparative advantage, it does matter at the margin, for countries whose competitiveness depends on low-cost production, as in our theoretical framework (World Bank 2020, Ch. 5)
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