Is Environmental Tax Harmonization Desirable in Global Value Chains?
40 Pages Posted: 27 Sep 2019 Last revised: 11 May 2020
Date Written: March 26, 2020
The spatial unbundling of parts production and assembly currently characterizes globalization, leading to the worldwide dispersion of pollution. We consider socially optimal (cooperative) environmental taxes in a two-country model of global value chains in which the location of both parts and assembly can differ. When unbundling costs are so high that parts and assembly must colocate in the pre-globalized world, pollution is spatially concentrated, and harmonizing environmental taxes maximizes global welfare. In contrast, with low unbundling costs triggering the dispersion of parts and thus pollution throughout the world as today, harmonization fails to maximize global welfare. Similar results hold when the two countries non-cooperatively choose their environmental taxes.
Keywords: Environmental policy; Fragmentation; International coordination; Emission tax; Trade in parts and components
JEL Classification: F18; F23; Q56; Q58
Suggested Citation: Suggested Citation