Trade , CO 2 , and the Environment ( Job Market Paper )

This paper puts the gains from trade and the environmental costs of trade on the same theoretical and empirical footing in order to provide a more complete measure of trade’s welfare effects. To undertake this analysis, the paper describes a model of trade and the environment, compiles new data on the CO2 emissions from intranational and international shipping, and estimates the model’s key parameters using instrumental variables. Two key findings emerge. First, the gains from international trade exceed the environmental costs of international trade by two orders of magnitude. Second, a global carbon tax of $20/ton on the CO2 emissions from all air and sea shipping would decrease international trade by half a percentage point, increase global welfare, and have regressive incidence. Proposed EU and US taxes on the CO2 emissions from shipping increase unregulated CO2 emissions, divert trade to unregulated routes, and also have regressive incidence, but they too increase global welfare. ∗MIT Economics (email: [email protected]). I am extremely grateful to Michael Greenstone, Arnaud Costinot, and David Autor for guidance and support. I also thank Josh Angrist, Amanda Brewster, Victor Chernozhukov, Brian Copeland, Dave Donaldson, Esther Duflo, Amy Finkelstein, Nathan Hendren, Chris Knittel, Greg Leiserson, Gib Metcalf, Sergey Paltsev, Nick Ryan, Ashley Swanson, and seminar participants at the KSG, MIT, and UCEI for insightful comments. An EPA STAR fellowship and the Shultz Fund provided valuable support.