Emission Taxes and Border Tax Adjustments for Oligopolistic Industries

We examine the welfare consequence of emissions tax with and without a Border Tax Adjustment for an imperfectly competitive industry, where intraindustry trade arises between countries. BTA allows a government to impose a pollution-content tari¤ on imports and refund an emission tax for export sales. We analyze the structure of an optimal emission tax with BTA when a government chooses its emission tax rate to maximize its national welfare. We show that the optimal emission tax policy with BTA achieves greater national welfare and higher environmental quality than the optimal policy without BTA. Address for Correspondence: Faculty of Economics, Sophia University, 7-1, Kioi-cho, Chiyodaku, Tokyo, 1028554, Japan. E-mail: [email protected]. We thank an anonymous referee, Eric Bond, Ichiroh Daitoh, and Yasuhiro Takarada for very helpful suggestions on earlier versions of this paper. We also bene…ted from comments of seminar and conference participants at APTS in Honolulu, Chukyo-Kyoto Conference on Trade and Macro Economic Dynamics in Nagoya, Midwest International Trade Meeting in St. Louis, National Graduate Institute for Policy Studies in Tokyo, United States International Trade Commission, Vanderbilt University, and University of Bari. The authors gratefully acknowledge …nancial support from Mitsui &Co., Ltd. Environment Fund and Japan Foundation. Yomogida is very grateful to Kikawada Foundation and Seimeikai Foundation for …nancial support.