Trade Liberalisation, Transboundary Pollution and Market Size

Author Name Rikard FORSLID  (Stockholm University) /OKUBO Toshihiro  (Keio University) /Mark SANCTUARY  (Stockholm School of Economics)
Creation Date/NO. April 2015 15-E-041
Research Project Trade and Industrial Policies in a Complex World Economy
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This paper uses a monopolistic competitive framework with many sectors to study the impact of trade liberalization on local and global emissions. We focus on the interplay of the pollution haven effect and the home market effect and show how a large-market advantage can counterbalance a high emission tax, implying that trade liberalization leads to lower global emissions. Generally, our results suggest that relative market size, the level of trade costs, the ease of abatement, and the degree of product differentiation are relevant variables for empirical studies on trade and pollution.