Unilateral Environmental Policy Research Articles

Unilateral Environmental Policy and Offshoring

Unilateral Environmental Policy and Offshoring

North–South asymmetry, unilateral environmental policy and carbon tariffs

AbstractThis paper focuses on the potential impact of a carbon tariff on carbon emissions, North–South trade and welfare. We use a North–South trade model, where North implements a unilateral environmental policy on domestic carbon‐intensive industries followed by a carbon tariff on imports from South. Unlike the existing studies, we allow asymmetry in clean production technologies and marginal environmental damage. We show that a carbon tariff can reduce the global carbon emission via the use of a more advanced clean production technology in North, which increases the firm profit and welfare. However, improvement in welfare of North is associated with a decrease in global trade flows and welfare of South. We find that, in the presence of asymmetry in clean production technologies between North and South, a carbon tariff introduced by the North can eliminate carbon leakage, but the exports of South decrease below the pre‐unilateral environmental policy level and hence North can potentially use a carbon tariff for trade protectionism in the name of reducing carbon leakage in South.

The pollution haven effect and investment leakage: The case of the EU-ETS

Are polluting firms more likely to invest in environmentally lax countries when confronted with increasingly stringent unilateral environmental policies at home? To answer this question, we explore the relationship between carbon inefficiency, regulatory pressure and the foreign direct investment (FDI) projects of multinational enterprises (MNEs) operating under the European Union Emission Trading Scheme (EU-ETS) during its third phase (2013–2020). Contrary to prior research on its initial and more lenient phases, we provide novel evidence on the existence of a pollution haven effect which enables both investment leakage as well as carbon leakage outside the EU-ETS’s jurisdiction. These results highlight the dangers of implementing a stringent unilateral climate policy from both an economic and an environmental perspective.

Cournot, Pigou, and Ricardo Walk into a Bar: Unilateral Environmental Policy and Leakage with Market Power and Firm Heterogeneity

We study the determinants of emission leakage using a two-country general equilibrium model with heterogeneous firms and Cournot competition. We show that firms from the nonregulating country respond to the implementation of Pigouvian emission taxes on their competitors abroad and the subsequent gain in comparative advantage by increasing markups rather than output. We find that this effect, jointly with the exit of the least productive and most emission-intensive firms, can provoke a reduction of emissions in the nonregulating country and thus increase the effectiveness of the unilateral emission tax. Border emission taxes dampen the market power gains of nonregulated firms and thus reduce the effectiveness of a unilateral emission tax.

Cournot, Pigou, and Ricardo Walk in a Bar – Unilateral Environmental Policy and Leakage With Market Power and Firm Heterogeneity.

Policymakers aiming for the unilateral regulation of transboundary pollutants, such as greenhouse gases, fear as a consequence rising emissions in non-regulating countries. This so-called pollution haven or carbon leakage effect is of particular concern in emission-intensive and trade-exposed sectors such as steel, aluminium or chemical production. While these industries are often characterised by market concentration, most models that study the effectiveness of unilateral environmental policies operate under perfect or monopolistic competition, ruling out the adjustment of markups and cost pass-through rates. We study the determinants of emission leakage using a two-country general equilibrium model with heterogeneous product varieties and Cournot competition. We show that firms from the non-regulating country respond to the implementation of Pigouvian emission taxes on their competitors abroad and the subsequent gain in comparative advantage by increasing markups rather than output. We find that this effect, jointly with the exit of the least productive firms, can provoke a reduction of emissions in the non-regulating country and thus increase the effectiveness of unilateral emission regulation. Consumption gains from selection in non-regulating countries are offset by the use of market power by local firms.

On the Effects of Unilateral Environmental Policy on Offshoring in Multi-Stage Production Processes

In the last decades supply chains emerged that stretch across many countries. This has been explained with decreasing trade and communication costs. We extend the literature by analyzing if and how unilateral environmental regulation induces offshoring to unregulated jurisdictions. We first apply an analytical partial-equilibrium model of a two-stage production process that can be distributed between two countries and investigate unilateral emission pricing and its supplementation with border carbon taxes. To get a more comprehensive picture, we subsequently apply a computable general equilibrium model that includes a better representation of international supply chains. We find heterogeneous, but mostly positive effects of a unilateral carbon emission reduction by the European Union on the degree of vertical specialisation of European industries and explain these differences by heterogeneity in the emission-intensity and pre-policy vertical specialisation of sectors. Border taxes are successful in protecting upstream industries, but with negative side effects for downstream industries.

On the effects of unilateral environmental policy on offshoring in multi‐stage production processes

AbstractWe extend the literature on global supply chains by analyzing if and how unilateral environmental regulation induces offshoring. We develop an analytical model of two‐stage production processes that can be distributed between two countries and investigate unilateral emission pricing and its supplementation with border carbon taxes. In contrast to existing final good models, we are able to show how impacts of regulation differ across the different stages of the supply chain, depending on the interplay of comparative advantages and general equilibrium effects. To get a more comprehensive picture, we subsequently apply a computable general equilibrium model that includes a representation of international supply chains. We find heterogeneous but mostly positive effects of a unilateral carbon emission reduction by the European Union on the degree of vertical specialization of European industries. Border taxes are successful in protecting upstream industries, but with negative side effects for downstream industries.

Unilateral Environmental Policy Choices

This paper demonstrates that the notion of environmental policy as a secondary trade barrier needs substantial modification when production pollution and consumption pollution coexist. The paper first focuses on local pollution and unilateral tax adjustments, showing that, under certain conditions, jointly increasing production taxes and consumption taxes to neutralize terms of trade effects raises welfare by more than consumption tax hikes alone in pursuit of terms of trade gains. Relatedly, this paper shows that production tax hikes alone resulting in terms of trade deterioration can increase welfare by more than that of the above policy mix. I then extend the analysis to the case where pollution emissions are global, showing that environmental policy as a secondary trade barrier can prevent emissions leakages and is therefore mutually welfare-improving. The main message of this paper is that regardless of whether pollution emissions are local or global, unilateral environmental policy is less harmful than previously thought, and a two-pronged policy approach relying on consumption taxes and production taxes is a good candidate for both unilateral and cooperative mitigation actions.

The dynamic impact of unilateral environmental policies

This paper builds a two-country, two-sector (polluting, nonpolluting) trade model with directed technical change, examining whether unilateral environmental policies can ensure sustainable growth. The emission rate of the polluting sector depends on its relative use of a clean and a dirty input. A unilateral policy combining clean research subsidies and a trade tax can ensure sustainable growth, while unilateral carbon taxes alone increase innovation in the polluting sector abroad and generally cannot ensure sustainable growth. Relative to autarky and exogenous technical change respectively, trade and directed technical change accelerate environmental degradation either under laissez-faire or with unilateral carbon taxes, yet both help reduce environmental degradation under the appropriate unilateral policy. I characterize the optimal unilateral policy analytically and numerically using calibrated simulations. Knowledge spillovers have the potential to reduce the otherwise large welfare costs of restricting policy to onecountry.

The Green Paradox in Open Economies: Lessons from Static and Dynamic Models

This article examines how, in a world with incomplete coordination among countries, well-intentioned unilateral environmental policies may actually harm the global environment. This outcome is known as the “Green Paradox.” The incentives for free-riding and the challenge of achieving an effective international environmental agreement are reviewed. I examine the various channels that lead to carbon leakage in static models of open economies, and report some simulation results. This is complemented by a review of the potential for Green Paradox outcomes in dynamic open-economy models in which forward-looking firms exploit an exhaustible resource. I show that border tax adjustments can lead to Green Paradox outcomes. I also discuss priorities for future research on environmental policies in a trading world that lacks a central enforcement agency.

Environmental Policy and Directed Technical Change in a Global Economy: The Dynamic Impact of Unilateral Environmental Policies

This paper builds a two-country (North, South), two-sector (polluting, nonpolluting) trade model with directed technical change, examining whether unilateral environmental policies can ensure sustainable growth. The polluting good is produced with a clean and a dirty input. I show that a temporary Northern policy combining clean research subsidies and a trade tax can ensure sustainable growth but Northern carbon taxes alone cannot. Trade and directed technical change accelerate environmental degradation either under laissez-faire or if the North implements carbon taxes, yet both help reduce environmental degradation under the appropriate unilateral policy. I characterize the optimal unilateral policy analytically and numerically using calibrated simulations.

International trade and climate change

This paper provides a selective review of the interaction between international trade, international trade policies, environmental policies and climate change. The focus is on the role that international trade and the existence of countries have on the generation of emissions leading to greenhouse gas stocks in the atmosphere and hence, potentially, to climate change and on the role of trade and environmental policies in dealing with this global externality. We first review the question of whether trade exacerbates or contributes to the climate change problem by increasing global emissions, a particularly important issue being the pollution haven problem. Then we consider environmental policies and trade. We analyse non-cooperative environmental policies and investigate whether trade undermines the effectiveness of unilateral environmental policies, in which carbon leakage and international competitiveness are of particular importance. To deal with climate change, cooperation among countries is important. In this aspect, we review the interactions between trade and environmental policies, border tax adjustment policies, and the role of the World Trade Organization in combating climate change arising from economic activities.

Addressing biodiversity loss when international markets of agricultural commodities are oligopolistic

Recent evidence shows that international markets of agricultural commodities are oligopolistic. This article uses a theoretical framework to identify the effects of adopting either unilateral (i.e. non-cooperative) or cooperative environmental policies on local biodiversity when countries compete in this market structure. The results reveal that unilateral environmental policies can negatively affect local biodiversity in foreign countries. This suggests that protection of natural habitats can only be achieved by means of international cooperation.

Trade, Technical Progress and the Environment: The Role of a Unilateral Green Tax on Consumption

The paper proposes a two-country general equilibrium model of endogenous growth and trade between two regions, North and South, with different environmental standards. Pollution is a by-product of consumption and in order to abate it the northern region unilaterally imposes a green tax on consumption. As the tax affects domestic demand of consumer goods according to their pollution intensities, regardless of where those goods are produced, the model shows that such a unilateral environmental policy can increase the speed of technological change and pollution abatement in both regions.

Trade, Technical Progress and the Environment: the Role of a Unilateral Green Tax on Consumption

The paper proposes a two-country general equilibrium model of endogenous growth and trade between two regions, North and South, with different environmental standards. Pollution is a by-product of consumption and in order to abate it the northern region unilaterally imposes a green tax on consumption. As the tax affects domestic demand of consumer goods according to their pollution intensities, regardless of where those goods are produced, the model shows that such a unilateral environmental policy can increase the speed of technological change and pollution abatement in both regions.

The Effects of Unilateral Environmental Regulations in a World with Capital Mobility and Trading Costs

Our paper discusses the management of global pollution issues in a North-South economic geography model with capital mobility and trading costs. We first show that a unilateral environmental policy adopted by the developed country drives the industrial firms out of the region and lowers real income. However, the ecological dumping argument has only found partial theoretical support as the Northern larger market still attracts firms. More importantly, the total effect on the environment appears ambiguous: due to multiple interactions at work, globalization can make pollution even worse. These outcomes provide arguments for international cooperation. However, although efficient in reducing global pollution, this second option hurts the South both in terms of industrial relocation and real income.

The Permissible Reach of National Environmental Policies

Domestic instruments affect public order but are negotiable, and, consequently, is scheduled. Public order is unilaterally defi ned, but must respect the default rules concerning allocation of jurisdiction that are common to all WTO Members and bind them by virtue of their appurtenance to the international community. In this article, we focus on the interaction between trade and environment. The purpose of this study is to highlight how these rules and the GATT/WTO jointly determine the scope for unilateral environmental policies for WTO Members. In the study we examine the relevant multilateral framework dealing with this issue, as well as the relevant GATT and WTO case law. We also briefly present the jurisdictional default rules in public international law. We consider a series of scenarios, partly building on factual aspects of cases that have already been brought before the WTO. These scenarios are intended to isolate issues of specifi c interest from a policy point of view. For each scenario we then seek to determine what would the outcome be, in case WTO adjudicating bodies were to explicitly take account of the default rules concerning allocation of jurisdiction, something that has not been done to date. Our main conclusions are twofold: on occasion, the outcome would be different had WTO panels observed the default rules concerning allocation of jurisdiction; more generally, the default rules can help us understand the limits of some key obligations assumed under the WTO. Crucially, absent recourse to the default rules concerning allocation of jurisdiction, one risks understanding non-discrimination (the key GATT obligation) as an instrument aimed to harmonize conditions of competition across markets, and not within markets, as the intent of negotiators has always been.

Dumping environnemental et délocalisation des activités industrielles : le Sud face à la mondialisation

Résumé Dans le cadre d’un modèle d’économie géographique appliqué à une configuration Nord-Sud, nous nous proposons dans cet article de discuter du problème de la gestion des pollutions globales telles que les émissions de gaz à effet de serre. Les firmes étant susceptibles de répondre au moins-disant environnemental, la régulation d’un pays en matière d’émissions est soumise à la concurrence spatiale. Dans ce contexte, nous nous interrogeons en premier lieu sur les marges de manœuvre dont bénéficie le Nord pour une politique environnementale unilatérale. Outre le caractère coûteux de cette politique pour le Nord, nous montrons que l’efficacité de l’unilatéralisme en termes de réduction des émissions de polluants est ambigu. D’autant que le processus de mondialisation, en modifiant l’interaction des forces en jeu, risque paradoxalement d’accompagner l’unilatéralisme d’une aggravation de la pollution mondiale. En second lieu, nous étudions les conséquences d’une harmonisation mondiale des normes environnementales. Ce deuxième scénario, préférable d’un point de vue écologique, pénalise le Sud tant en termes de redéploiement des activités industrielles qu’en termes de baisse de revenu réel. Classification JEL : F12 - Q20 - R10

The Opening of the European Electricity Market and Environmental Policy: Does the Degree of Competition Matter?

This paper studies the relevance of strategic trade effects in the environmental policy for the European electricity sector. The production, investment and trade of electricity are modelled for four European countries. Three market regimes are distinguished: perfect competition, price regulation and Cournot competition. The model is used to examine the effect of the degree of competition on the state of the environment and to study the strategic trade effects of unilateral environmental policies.

Carbon Leakage in a Small Open Economy with Capital Mobility

The carbon emissions abatement, undertaken by some countries, may induce other countries to increase their own emissions. This effect, known as - carbon leakage, may be due to rather different mechanisms. The simplest case is when outside countries do not change their environmental policies and world prices are fixed. Unilateral policies may then induce a substitution of domestic production, generating emissions, with imports. This paper analyses the carbon leakage generated under the - small open economy - assumption, illustrating some findings through a numerical, dynamic, general equilibrium model of the Italian economy. The analysis highlights two main points. First, in a general equilibrium setting, the carbon leakage depends on both the substitution and income effects. Income effects, in turn, crucially depend on how carbon tax revenues are recycled, or pollution rights rents are assigned. Different recycling schemes have rather different impacts on the national income and on the trade-induced leakage. Second, carbon leakage may be significantly affected by the degree of capital mobility in international markets, because capital services enter the balance of trade. Capital outflows amount to exports of capital services, possibly financing the import of carbon-intensive goods. This result suggests that, in a world of increasingly integrated financial markets, unilateral environmental policies are becoming less effective, because of the existence of policy spill-overs.