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Strategic Environmental Taxation and International Trade

28 Pages Posted: 2 Aug 2012  

Luciana Echazu

Clarkson University

Martin D. Heintzelman

Clarkson University School of Business

Date Written: June 21, 2012

Abstract

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 Â…find a non-monotonic relationship between emissions and productivity.

Keywords: trade and the environment, strategic environmental policy, new trade theory

JEL Classification: Q56, F12, F18

Suggested Citation

Echazu, Luciana and Heintzelman, Martin D., Strategic Environmental Taxation and International Trade (June 21, 2012). Available at SSRN: https://ssrn.com/abstract=2121674 or http://dx.doi.org/10.2139/ssrn.2121674

Luciana Echazu (Contact Author)

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315-268-6456 (Phone)

Martin D. Heintzelman

Clarkson University School of Business ( email )

Potsdam, NY 13699-5780
United States

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