Trade Liberalization and Environmental Taxation in Federal Systems

Abstract

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Trade Openness and Environmental Policy Stringency: Quantile Evidence

“…Moreover, the instrument count is smaller than the number of countries. Moving to the estimate of particular interestacross regressions, trade has a positive and significant effect on environmental policy stringency, supporting the climb to the top hypotheses, consistent with Damania et al [19]. The rationale could arise because the governments of OECD countries are more responsive to demand for environmental improvements and/or because stricter environmental regulation improves the international competitiveness of OECD countries by driving enterprise innovation toward technologies that protect the environment or produce less environmental damage, whereas the compliance costs are negligible.…”

“…Of the other explanatory variables, FDI strengthens environmental regulation stringency across quantiles, supporting the view that FDI will raise the emission standard of the host country, resulting in a race to the top phenomenon, consistent with the Porter hypothesis. Similarly, across quantiles, better control of corruption constrains environmental regulation, consistent with Damania et al [19] and Cole [37] that corruption might lead to lax stringency and enforcement of the environmental policy. Better information infrastructure proxied by the internet uses alleviates stringency in environmental regulation at lower quantiles but strengthens it at higher quantiles.…”

“…Still, several recent studies, based on a political economy approach, postulate that the trade's effect on environmental regulation depends on the size of the relative shifts in the political power of industrial and environmental lobby groups, which is further determined by a country's comparative (dis)advantage in the polluting sector [12,13], the extent of substitution between foreign and domestic goods [14], the distribution of production factor ownership [15], who, producers or consumers, ultimately generates pollution [16], domestic political constraints, and the issue visibility of the pollutant [17], or quality and structure of political institutions [18,19]. It is thus not clear ex ante whether, and to what extent, trade would influence environmental regulation stringency.…”

“…Data on these variables are taken from the World Development Indicators of the World Bank and in logs. Control of corruption is included to account for the corruption effect: less corruption means a greater weight on social welfare and hence more stringent environmental policy [19,31]. Data on control of corruption are sourced from the Worldwide Governance Indicators of the World Bank, with the value ranging from −2.5 to 2.5.…”