Environmental taxes and international spillovers: The case of a small open economy ¬リニ

a r t i c l e i n f o JEL classification: D58 D62 F18 H23 Keywords: Small open economy Externality Efficiency cost Abatement cost Border tax adjustment Free emissions allocations In the existence of trade interaction, a sub-global climate change policy can generate externality, which can cause competitiveness issues for the producers in compliant regimes. However among compliant regions, a small economy also receives a significant spillins effect when a large economy takes some regulatory actions that affect, particularly , the world prices of traded commodities. This externality can have notable impacts on the efficiency and pollution abatement opportunities of the small compliant regime with a trivial converse effect. In some cases, these impacts on the efficiency and emissions abatement can be in opposite directions. We capture these findings by incorporating two protection polices (i.e., border tax adjustment and free emissions allocations to emission-intensive and trade exposed industries) in a multi-region analytical and numerical general equilibrium modeling framework. These results convey that the large economies hold leading strategic positions towards a cooperative global climate change movement because of their policies' influences on the small economies. This paper investigates spillovers effects in a situation in which two regions implement mutually exclusive environmental policies while they differ in their size. The only interaction that they have is through international trade. Given the fact that the size of economy matters (e.g., see Kennan and Riezman, 1988), it evokes that the large economy is able to shift part of its policy-induced economic burden to the small economy while the vice-versa effect is trivial. Moreover, if the large economy decides to protect its producers through some interior or border measures, then the small economy receives a significant spillins effect, 1 even though the large economy does not directly impose the protection policy to the small region. Understanding the direction and the strength of such spillins effect on the small region seems an interesting research topic. Surprisingly, the issue of such spillovers within the context of small and large environmentally regulated open economies has received little attention by researchers; nonetheless the idea of spillovers in other contexts is well covered. 2 Williams (1966) indicates that the decisions of a jurisdiction, in a multi-jurisdictional framework, affect and are affected by the decisions of others. These spillovers (they are created by either economic interaction, fiscal interdependence, or resource mobility) are so complex which makes it difficult …