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

Abstract

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.

Keywords: Trade, environment, consumption externality, technological change

JEL Classification: O30, I32, F14, F18