International Trade, Emissions Trading Systems, and Sectorally Differentiated Environmental Regulations

Author Name TAKARADA Yasuhiro  (Nanzan University)
Creation Date/NO. June 2013 13-J-042
Research Project Economic Analysis of Environmental, Energy, and Resource Strategies Following the Great East Japan Earthquake
Download / Links


This paper examines the welfare effects of the enforcement of emissions trading systems when the government initially imposes sectorally differentiated environmental regulations. The implementation of emissions trading is generally considered to be welfare enhancing because it equalizes the marginal abatement costs between sectors. First, contrary to conventional wisdom, we find that a small open economy is harmed by the enforcement of emissions trading if there is a reasonable relation between the import tariff rate (pollution content tariff) and the initial disparity of environmental regulations across sectors. To avoid welfare deterioration, the government should decrease the import tariff in accordance with mitigation of the sectoral difference in regulations through emissions trading. Our result suggests that the enforcement of emissions trading systems should be accompanied by trade liberalization. Second, in a two-country model, we show that international emissions trading may harm the home country that implements sectorally differentiated environmental regulations and buys emission permits but benefits the foreign country that implements uniform environmental regulations and sells emission permits, if the home country exports clean goods and the foreign country exports pollution intensive goods. The home country may lose from permit trading because its terms of trade deteriorate through changes in production caused by permit trading. This result suggests that a country with sectorally differentiated country should purchase emission permits at a sufficiently low price to benefit from international emission trading.