Abstract
The aim of this chapter is to set out and discuss the theoretical considerations that led to the claim that successful combat of degradation of global environmental commons may require the use of trade instruments. Furthermore, we raise open issues regarding eco-tariffs to protect global environmental commons which shall be addressed in chapters 8, 9 and 10.
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References
See Srinivasan [1993, 23].
Pareto optimally of the trade equilibrium rests on a number of assumption, of which the absence of distortions such as (uninternalised) externalities is one. If the distortion is not corrected, the resulting equilibrium price will not reflect all social cost, and the allocation will thus not be optimal, see Bhagwati [1987/1971].
See Snape [1992,76].
See GATT [1992, 34], compare also Simonis & Weizsäcker [1990, 40/41], and Zimmermann [1992].
Harm done by global emissions have an identical impact, regardless of where they are emitted; therefore, a tax internalising the negative externality would have to be uniform across the globe; compare Baumol & Oates [1988, 279] and Siebert [1995a, ch. 13].
Compare Blackhurst & Subramanian [1992, 256], GATT [1992, 35], and Siebert [1995a, 199].
Compare Siebert [1995a, 199].
Compare Blackhurst & Subramanian [1992, 256], GATT [1992, 34/35]. A further reason for failure of a global environmental agreement is difference in risk attitude towards a particular environmental problem or a different interpretation of scientific evidence pointing towards such risks (compare Blackhurst & Subramanian [1992, 256], GATT [1992, 35], and Siebert [1995a, 199].
See Barrett [1994a&b].
All countries — respectively their citizens — benefit from reduced pollution; they cannot be excluded from these benefits and there is no rivalry in the ‘consumption’ of a cleaner global environment; compare Blackhurst & Subramanian [1992, 258].
See Carraro & Siniscalco [1992, 384] and Pethig [1983, 59].
Compare Carraro & Siniscalco [1992, 385].
Compare Helm [1996, 221/2]. For a compilation of leakage rate estimates in various static and dynamic general equilibrium models see Barker & Johnstone [1998]. Leakage rates found in different studies vary greatly; most static general equilibrium models find leakage rates of less than 10%; however, one result is as high as 80% (see Barker & Johnstone [1998, 95]). Results in dynamic general equilibrium models vary even more, namely from negative leakage to marginal rates of almost 100%; the majority of the models, however, predicts leakage rates below 30% (see Barker & Johnstone [1998, 95–97]).
See Weizsäcker & Welsch [1991], Klepper [1994].
See Baumol & Oates [1988], Srinivasan [1993], Lloyd [1992], Koopmann [1995].
See Barrett [1994a], Mæstad [1998].
He graphically analyses a two-country two-commodity case where production of one good causes trans-border pollution of the global environment. The two countries engage in trade. If the exporting country does not implement a pollution tax (or other suitable instrument), the importing country can reduce pollution by charging a domestic tax and a tariff to internalise the externality.
He considers two economies, each producing and trading two commodities. Production of one good gives rise to global pollution, causing disutility for the population in both countries. The government in one of the countries (‘home’) is assumed to maximise social welfare by means of a tax structure. The tax structure consists of taxes on production, consumption and trade, and lump sum redistributions. The other country’s (‘foreign’) government does not levy any taxes, nor does it retaliate to any tax implemented at ‘home’. Markusen solves for necessary conditions which must be satisfied by the tax structure maximising social welfare at ‘home’.
The effect of a tariff levied by a large country is to increase the domestic price of the import good; the price of this good in the rest of the world, however, is reduced. This improves the terms of trade of the tariff-setting country. Furthermore, the price reduction in the rest of the world reduces production of the good whose PPM pollutes the global environmental and therefore emissions.
Rauscher [1991b] considers two countries using two factors of production (capital and an environmental resource) for the production of two goods that are internationally traded. In both countries, one sector uses the environment as fixed input factor, thereby causing pollution.
It is assumed that only one country (‘home’) takes regulatory measures and ‘foreign’ does not retaliate to ‘home’s’ policy.
This trade tax, levied on the good whose PPM pollutes the global environment has two parts: an optimal tariff part (see above) with which a large country uses its market power to change the price level to improve its terms of trade.
See for example Baumol & Oates [1988], Subramanian [1992].
See Subramanian [1992, 149]; also Barrett [1994a, 31].
Blackhurst & Subramanian [1992, 262] state:....”most analysts with practical experience in promoting international cooperation have a clear preference for relying on positive incentives rather than sanctions whenever the necessary level of cooperation is not voluntarily forthcoming.” Compare also Subramanian [1992, 139&146]. Advantages of positive sanctions are mostly psychological. However, they also have disadvantages, namely the problem that positive sanctions may induce opportunistic behaviour to obtain these sanctions.
For example, none of the existing multilateral environmental agreements contains provisions for trade sanctions, if sanctions are interpreted to apply to unrelated products (see Blackhurst & Subramanian [1992, 262]).
Barrett [1994b] formulates a partial equilibrium model to analyse trade restrictions in the sole function to bring about and sustain international cooperation to safeguard global environmental commons.
Baumol & Oates [1988, 277/8] state very clearly: “Thus, the notion of transnational resources charges [i.e. eco-tariffs] may help in one of two ways: either as a threat that helps to stimulate effective cooperation, or by serving as an instrument of second resort in the event some countries, by refusing cooperation, continue to pose a threat to health and welfare in other nations.”
Feketekuty [1993, 194] finds that “Trade measures are also sometimes used..... to prevent the relocation of environmentally-damaging practices to non-signatory countries,...” Feketekuty identifies an additional positive effect of trade measures, namely the solution of the free-rider problem by preventing non-cooperating countries from obtaining environmental benefits without contributing to emission reductions.
Sanctions are not only seen as trade restrictions on all sorts of im- or exports but in a wider sense also as suspension of cooperation on other issues, or restrictions on financial transactions (Blackhurst & Subramanian [1992, 261]).
Blackurst & Subramanian [1992, 262]: “Generally speaking, the primary purpose of trade provisions is to prevent developments in the trade of [non-cooperative countries] from undermining the effectiveness of [other countries’ actions]. But in most instances, the trade provisions have the incidental effect of treating participants more favourably than non-participants...., therefore, the trade provisions create a positive incentive to join the agreement...”.
Bhagwati [1993b, 188]: ‘7 should imagine that the possibility of (second-best) remedial action [i.e. eco-tariffs]..... may even encourage the offending party to adopt appropriate (first-best) remedial action [i.e. taxing pollution] within its own jurisdiction to restrict the emission of cross-border pollution.”
The optimal tariff literature is a good example for the fact that relying on an analysis that excludes retaliation may well result in fallacious conclusions: A country large enough to improve its terms of trade by charging a tariff on imports (or levying a tax on exports) can maximise its welfare by charging optimal import tariffs and export taxes. Yet, the welfare improvement of the optimal unilateral trade policy vanishes as soon as the other country can respond to it. Krugman & Obstfeld [1997, 226] therefore conclude that the optimal tariff argument has little relevance for actual trade policy-making.
In an optimal tariff game, one country’s optimal tariff negatively affects the terms of trade for its trading partner. The optimal tariff is thus an externality since its effect upon the other country’s welfare is not taken into account. If both countries charge optimal tariffs, the reciprocal externalities cause a decrease in global welfare, although it is possible that one country still gains. The situation is similar to a Cournot duopoly where firms also cause each other negative externalities (Tirole [1988, 219]).
We should note that positive global welfare consequences are a definite argument in favour of eco-tariffs. However, if the welfare effects are indeterminate, this should not lead to the conclusion that eco-tariffs are not to be recommended. The case one could make for them would only be weakened.
One exception are Baumol & Oates [1988, 276] who discuss “tariffs both in the role normally assigned to taxes in the externality literature [tariffs as cross-border Pigouvian taxes], and as part of a threat strategy designed to induce the generator of trans-national pollution to modify its behaviour”. Furthermore, Ludema & Wooton’s [1994] analysis shows that even in the absence of environmental benefits for the country taking the measure, strategic considerations serve as an incentive to control trans-border pollution.
Owing to the caveats against using unfocussed trade sanctions to discipline countries into obeyance of an international environmental agreement, we shall not address what has been termed ‘issue linkage’, i.e. the connection of general trade relations and environmental policy implementation. For a discussion of the potential of linking trade relations to policy measures addressing global environmental problems see Krumm [1996, ch. 8] and Bodecker [1997, ch. 5].
However, a successful example exists with the Montreal Protocol which employs trade instruments with the twin aim of bringing countries to cooperate on global environmental issues while at the same time serving to avoid leakage of measures undertaken to reduce emissions.
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Kraus, C. (2000). The Role of Tariffs in Protecting Global Environmental Commons. In: Import Tariffs as Environmental Policy Instruments. Economy & Environment, vol 19. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-9614-5_7
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