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Trade and commodity taxes as environmental instruments in an open economy

Onur A. Koska (Department of Economics and Finance, University of Canterbury, Christchurch, New Zealand)
Frank Stähler (University of Tübingen, Tübingen, Germany,) (University of Adelaide, Adelaide, Australia) (CESifo, Munich, Germany) (NoCeT, Bergen, Norway)
Onur Yeni (Hacettepe University, Ankara, Turkey)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 25 June 2020

Issue publication date: 2 February 2021

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Abstract

Purpose

In a simple reciprocal dumping model of trade, this study scrutinizes the strategic role of trade and commodity taxes as environmental instruments when consumption of an imported product generates pollution. The results suggest that for sufficiently small values of the marginal disutility from pollution, commodity taxes can be preferred over import tariffs, and compared to the case of trade policies, free trade can be welfare dominating even for higher values of the marginal disutility from pollution when commodity taxes are used strategically as environmental instruments.

Design/methodology/approach

The authors employ a reciprocal dumping model of trade.

Findings

A sufficiently high marginal disutility from pollution (or sufficient asymmetries between the countries in terms of their marginal disutility from pollution) may jeopardize bilateral trade, especially if countries are given the option to set tariffs freely for imported goods (consumption of which generate environmental pollution). For sufficiently weak transboundary pollution and sufficiently low marginal disutility from pollution, (1) both Nash trade and domestic policies may prove to be helpful in addressing consumption-based pollution, and (2) it is possible to show in such a case that Nash domestic policies may be preferred over Nash trade policies, especially when both transboundary pollution and the trading partner's marginal disutility from pollution are sufficiently low.

Originality/value

The novel contribution of this paper is (1) to capture asymmetries among trading partners in terms of how much they account for environmental pollution when deciding on their (domestic/trade) policy measures and (2) to focus on environmental degradation that is caused by final consumption of a product imported from a trading partner.

Keywords

Acknowledgements

The authors would like to thank the Editor and two anonymous referees for their helpful comments and suggestions. Also we would like to thank for comments the participants of the seminars and conferences at which earlier versions of this paper were presented. Frank Stähler gratefully acknowledges financial support received from the Australian Research Council under project number DP190103524. Onur Yeni gratefully acknowledges the PhD Research Fellowship (granted under 2214 International Research Fellowship Program) awarded by the Scientific and Technological Research Council of Turkey (TUBITAK). Usual disclaimer applies.

Citation

Koska, O.A., Stähler, F. and Yeni, O. (2021), "Trade and commodity taxes as environmental instruments in an open economy", Journal of Economic Studies, Vol. 48 No. 2, pp. 333-353. https://doi.org/10.1108/JES-08-2019-0362

Publisher

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Emerald Publishing Limited

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