Is Environmental Tax Harmonization Desirable in Global Value Chains?

Abstract

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.

Why Is Pollution from US Manufacturing Declining? The Roles of Environmental Regulation, Productivity, and Trade

“…A manufacturing product in our setting can be thought of as a sub-industry classification, where for example, SIC 3312 (blast furnaces and steel mills) is subdivided into 24 different products ranging from steel wire (33125) to cold rolled sheets and strip (excluding metallic coated and electrical) (33127). 5 Alternatively, we can write manufacturing pollution as equal to the total output of a product x s multiplied by a product-specific emissions factor e s . We can also represent manufacturing pollution emissions as the total output shipped by all manufacturing industries, X , multiplied by the sum of each product's share of total output, κ s ≡ x s /X , times an emissions coefficient reflecting pollution per dollar of output shipped of that product ( e s ≡ z s / x s ).…”

Trade, Consumption Pollution and Tax

“…In particular, if firms initially disperse across countries under no environmental regulation, identical consumption taxes are globally desirable regardless of market size. This finding is related to the literature on environmental tax harmonization, which seeks to construct a simple policy to deal with complicated environmental problems, especially in the presence of heterogeneous countries (e.g., Vlassis, 2013;Cremer and Gahvari, 2004;Cheng et al, 2020). Among others, Cheng et al (2020) examine whether environmental tax harmonization is globally desirable in global value chains given that countries differ in their average cost advantages of input production.…”

“…This finding is related to the literature on environmental tax harmonization, which seeks to construct a simple policy to deal with complicated environmental problems, especially in the presence of heterogeneous countries (e.g., Vlassis, 2013;Cremer and Gahvari, 2004;Cheng et al, 2020). Among others, Cheng et al (2020) examine whether environmental tax harmonization is globally desirable in global value chains given that countries differ in their average cost advantages of input production. They find that environmental tax harmonization is socially optimal when unbundling costs are high, but not when unbundling costs are low.…”

Trade, Transportation, and the Environment: Welfare Effects of Emissions Reduction and International Emissions Trading

“…The discussion here is related to environmental tax harmonization. See Cheng, Kato, and Obashi (2021).…”