Harmonizing tailpipe policy in symmetric countries: Improve the environment, improve welfare?

Trade, politics, and the environment: Tailpipe vs. smokestack

“…(2) Using Eqs. (25) and (26) Proposition 5 shows that openness' impact on the tax rate only depends on demand elasticity and direction of vested interests; this reversal has not been previously identified by the literature on environmental politics. The underlying intuition is the same as before: openness makes profits less (more) sensitive to changes in tailpipe (smokestack) policy, shifting incidence away from (toward) producers.…”

“…(1) From Eqs. (25) and (27) . When Z À 140, as is our maintained assumption, this is equivalent to the condition X D =X 1=N 41.…”

“…Schleich and Orden [31] re-consider this question in a large economy context and find governments will exploit trade taxes in the presence of each type of pollution. McAusland [25] shows how harmonizing tailpipe policy across identical countries may reduce welfare and environmental quality. 4 McAusland [24] compares policy preferences in a small open economy with their autarkic equivalent, and finds that producers of dirty goods want weaker smokestack regulation in the small open economy provided the world price of dirty goods is not sufficiently low.…”

“…These values are derived in McAusland [25]. Notably, the endowment represented by the political agent, X D , is independent of the trade regime and the size of the emission cap.…”

“…In this literature, only Schleich [30], Schleich and Orden [31] and McAusland [25] consider consumption-related pollution 3 ; we follow McAusland [25] in using a standardized treatment of political economy. Like McAusland [24] and Gulati [18], we examine the impact of opening up a closed economy.…”