International Trade and the Environment - Theoretical and Policy Linkages

Abstract

I review and extend three approaches to trade and environmental policies - competitive general equilibrium, oligopoly and monopolistic competition. The first two have surprisingly similar implications - deviations from first-best rules are justified only by constraints on policy choice (which motivates what I call a "single dividend" approach to environmental policy), and taxes and emissions standards differ in ways which reflect the Le Chatelier principle. I also show how environmental taxes may lead to a catastrophic relocation of industry in the presence of agglomeration effects, although not necessarily if there is a continuum of industries which differ in pollution intensity.Environmental policy; international trade policy; location and economic geography; pollution abatement; strategic trade policy