Strategic Environmental Taxation and International Trade
Martin D. Heintzelman
Clarkson University School of Business
June 21, 2012
Using a model of monopolistic competition with two countries, where we allow for technological asymmetries, we examine the relationship between intra-industry trade and environmental regulation. The decisions on emission standards set by each country show strong strategic interactions. We show that while regulations act as strategic substitutes in closed economies, this relationship may change once the countries open up to trade, depending on how the share of intra-industry trade between the two countries compares to the elasticity of substitution. While opening to trade unambiguously increases welfare, environmental regulations may increase or decrease depending on the share of intra-industry trade. In addition, we find a non-monotonic relationship between emissions and productivity.
Number of Pages in PDF File: 28
Keywords: trade and the environment, strategic environmental policy, new trade theory
JEL Classification: Q56, F12, F18
Date posted: August 2, 2012
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