Tuesday, May 06, 2014

Trade liberalisation and pollution taxes

Trade liberalisation leads to lower pollution taxes whether set federally or locally according to the latest working paper from Per Fredriksson.  However, if taxes are set locally pollution emissions may fall.  All in all, not an argument to show free trade is good for the environment - on balance this paper is more suggestive of the opposite effect.

The paper concludes:

While our model results do not predict an increase in pollution due to trade liberalization, it is notable that the environmental policy becomes less stringent as a result of trade liberalization. Hence, if one wants to rule out this eff ect, an addendum to trade liberalization agreements concerning the stringency of environmental policy could be considered, in particular if the country under consideration decides on environmental taxes at the federal level. Our fi ndings suggest that future empirical work that seeks to endogenize environmental policy may want to take into account at which governmental level policy is set.
Trade Liberalization and Environmental Taxation in Federal Systems

CESifo Working Paper Series No. 4717

PER G. FREDRIKSSON, University of Louisville - College of Business - Department of Economics

XENIA MATSCHKE, University of Trier - Faculty of Economics

The literature on trade liberalization and environment has not considered federal structures. This paper shows how the design of environmental policy in a federal system has implications for the effects of trade reform. Trade liberalization leads to a decline in pollution taxes regardless of whether pollution taxes are set at the federal (centralized) or local (decentralized) level, and it increases social welfare. The effect under a decentralized system is smaller than if these taxes are set by the federal government, and pollution emissions therefore decline in this case. Moreover, majority bias interacts with trade liberalization if federal taxes are used.

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