Environmental Policy and Firm Selection in the Open Economy

35 Pages Posted: 23 Jul 2019

See all articles by Udo Kreickemeier

Udo Kreickemeier

University of Tuebingen; CESifo (Center for Economic Studies and Ifo Institute); University of Goettingen (Gottingen) - Faculty of Economics and Business Administration

Philipp M. Richter

Dresden University of Technology - Faculty of Economics and Business Management; German Institute for Economic Research (DIW Berlin)

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Date Written: 2019

Abstract

In this paper, we analyse the effects of a unilateral change in an emissions tax in a model of international trade with heterogeneous firms. We find a positive effect of tighter environmental policy on average productivity in the reforming country through reallocation of labour towards exporting firms. Domestic aggregate emissions fall, due to both a scale and a technique effect, but we show that the reduction in emissions following the tax increase is smaller than in autarky. Moreover, general equilibrium effects through changes in the foreign wage rate lead to a reduction in foreign emissions and, hence, to negative emissions leakage in case of transboundary pollution.

Keywords: trade and environment, heterogeneous firms, unilateral environmental policy, emissions leakage

JEL Classification: F180, F120, F150, Q580

Suggested Citation

Kreickemeier, Udo and Richter, Philipp M., Environmental Policy and Firm Selection in the Open Economy (2019). CESifo Working Paper No. 7725. Available at SSRN: https://ssrn.com/abstract=3421152

Udo Kreickemeier (Contact Author)

University of Tuebingen ( email )

DE-72074 Tubingen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

University of Goettingen (Gottingen) - Faculty of Economics and Business Administration ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Philipp M. Richter

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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