Abstract
In this paper, we study the impact of environmental taxation on trade in environmental goods (EGs). Using a trade model in which demand for and supply of EGs are endogenous, we show that the relationship between environmental taxation and demand for EGs follows a bell-shaped curve. Above a cutoff tax rate, a higher tax rate can reduce bilateral trade in EGs because there are too many low-productivity EG suppliers. Based on trade data from 1995 to 2012 across the EU-27 countries, our empirical results are in accordance with the predictions of our model when we use the Asia-Pacific Economic Cooperation (APEC) list of EGs. We find that environmental taxation (measured as the ratio of environmental tax revenoe to GDP) has a monotonically positive impact on the number of trading partners. Furthermore, we show that if countries were to apply an environmental tax rate equal to \(3.96\%\) (e.g., the tax rate maximizing international trade in EGs), then trade in EGs across the EU-27 members would experience an increase of 25.33 percentage points. The results are mixed when we analyse the EGs on the OECD list. While the results for the the number of trading partners are confirmed when we use this list, there is no effect of environmental taxation on import demand.
Similar content being viewed by others
Notes
See annex C of the 2012 leaders’ declaration at http://www.apec.org/Meeting-Papers/Leaders-Declarations/2012/2012_aelm/2012_aelm_annexC.aspx (accessed January 03, 2013) and Article 31.3 of the Doha Declaration of the WTO at http://www.international.gc.ca/media/comm/news-communiques/2014/01/24a.aspx (accessed January 25, 2014).
Higher environmental tax rates make the use of EGs or clean technologies more attractive to polluting firms, thus increasing these firms’ willingness to pay for EGs (Wan et al. 2018).
This literature shows that stricter environmental regulations induce higher production costs, which may lead to relocation of dirty industries to countries with lower environmental taxation (Letchumanan and Kodama 2000; Muradian et al. 2002; Copeland and Taylor 2004; Levinson 2009). In contrast, according to the Porter hypothesis, more stringent but properly designed environmental regulations may yield innovation and, in turn, enhance competitiveness.
Note that the pollution intensity (\(e_{j}(v)/q_{j}(v)\)) is equal to \(\xi _{j}-\theta _{j}(v)/q_{j}(v)\). It is straightforward to verify that pollution intensity decreases with firm efficiency (see “Appendix A”).
Non-environmental goods (N-EGs) are goods other than the EGs included on the OECD and APEC lists (merged list).
Note that energy taxes represent the highest share of overall environmental tax revenue, accounting for approximately 75% of the EU-27 total in 2012 (see Table 2). The second-highest environmental tax revenues are from transport taxes, representing 20% of the EU-27 total in 2012. Pollution and resource taxes represent a small share (approximately 5%) of total environmental tax revenues (see Table 2). This category of taxes was implemented more recently than the others in Europe.
The 2-year lagged values of the environmental taxes pass the tests for the APEC as well as the OECD lists. The contemporary values for the APEC list and the 1-year lagged values for the two lists do not pass the Durbin-Wu-Hausman tests of endogeneity at 10% or lower. The results are available upon request.
In “Appendix D”, as a robustness check, following Egger et al. (2011), we use GDP per capita, land area, and the share of EG production (from the APEC and OECD lists) in total production as instruments. The results of our estimations regarding the impact of environmental taxation remain robust.
These data are available from EUROSTAT (http://appsso.eurostat.ec.europa.eu/nui/show.do?).
See “Appendix A” for the details of the derivation of a structural equation.
The OMR indexes are defined as if the sellers in each country shipped to a single world market, whereas the IMR indexes are defined as if buyers in each country imported from a single country. The two indexes consistently aggregate bilateral trade costs and decompose their incidence on producers and consumers. See Anderson (2010), Anderson and Yotov (2010) and Olivero and Yotov (2012) for further discussions.
In the standard approach, the price paid by the end consumer is the factory-gate price times a trade cost.
A positive result could also be due to a pollution haven effect (Mulatu et al. 2010). However, the results regarding the pollution haven hypothesis in Europe are inconclusive. Mulatu et al. (2010) find evidence in favor, whileCave and Blomquist (2008) and Raspiller and Riedinger (2008) do not find any such evidence. Moreover, Leiter et al. (2011) find a positive but diminishing impact of environmental regulation on investment.
Using panel data would help solve problems associated with omitted variables bias (Martıinez-Zaroso, Nowak-Lehmann and Horsewood, 2009).
The list of 155 countries is available upon request.
The cutoff ratio is obtained by using \(\frac{\partial a_{ijt}}{\partial t_{jt}}=(\widehat{\alpha }_{1}+2\widehat{\alpha }_{2}t_{jt})a_{ijt}=0\) or, equivalently, \(t_{jt}=-\widehat{\alpha }_{1}/(2\widehat{\alpha }_{2})\).
The negative marginal effects are associated with Denmark, a country that is characterized by a high level of environmental taxation (Klinge et al. 2003; Kosonen 2012) and that is a net exporter of EGs (Zugravu-Soilita 2019). Our results suggest that an increase in environmental taxes in Denmark would not be followed by a rise in import demand for EGs because the rivals of Danish firms seem to have higher production costs.
This result suggests that we are capturing an indirect effect of environmental taxation on domestic producers of N-EGs (polluting firms). If the environmental tax rate increases, then the price of N-EGs supplied by domestic firms increases, inducing higher imports of N-EGs (substitution effect).
These results are robust when we instrument the number of signed IEAs (see Table 14).
The data were collected from EUROSTAT (see http://appsso.eurostat.ec.europa.eu/nui/submitModifiedQuery.do).
We exclude services. The data were collected from EUROSTAT (see http://appsso.eurostat.ec.europa.eu/nui/submitModifiedQuery.do).
These specific taxes include energy taxes for trade in EGs in the energy sector (“Renewable energy plant” and “Energy/heat savings and management” in Group C of Table 1), pollution and resource taxes for the pollution management group (“Air pollution control,” “Waste water management”, “Solid waste management”, and “Environmental monitoring, analysis and assessment + noise and vibration abatement” in Group A of Table 1). The correlation coefficient between global environmental taxes and the specific taxes is 0.52 for energy taxes and 0.61 for pollution and resource taxes.
Data on trade were collected using the World Integrated Trade Solution (WITS) software (see http://wits.worldbank.org/wits/).
See https://stat.unido.org/home (accessed March 2, 2015) and the concordances at http://unstats.un.org/unsd/cr/registry/regot.asp? Lg=1 (accessed January 25, 2015) and http://wits.worldbank.org/wits/product_concordance.html (accessed January 25, 2015).
References
Ambec S, Cohen MA, Elgie S, Lanoie P (2013) The porter hypothesis at 20: can environmental regulation enhance innovation and competitiveness? Rev Environ Econ Policy 7:2–22
Anderson JE (2010) The incidence of gravity. In: van Bergeijk PAG, Brakman S (eds) The gravity model in international trade Advances and applications. Cambridge University Press, Cambridge
Anderson JE, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93:170–192
Anderson JE, van Wincoop E (2004) Trade costs. J Econ Lit 42:691–751
Anderson JE, Yotov YV (2010) The changing incidence of geography. Am Econ Rev 100:2157–86
Avery B, Boadu FO (2004) Global demand for US environmental goods and services. J Agric Appl Econ 36:49–64
Baier SL, Bergstrand JH (2007) Do free trade agreements actually increase members’international trade? J Int Econ 71:72–95
Baier SL, Bergstrand JH, Clance MW (2018) Heterogeneous effects of economic integration agreements. J Dev Econ 135:587–608
Baier SL, Bergstrand JH, Feng M (2014) Economic integration agreements and the margins of international trade. J Int Econ 93:339–350
Baumol WJ (1995) Environmental industries with substantial start-up costs as contributors to trade competitiveness. Ann Rev Energy Environ 20:71–81
Becker RA, Shadbegian RJ (2008) The green industry: An examination of environmental products manufacturing. US Census Bureau Center for Economic Studies Paper No. CES-WP-08-34
Birkland TA (2014) An introduction to the policy process: theories, concepts and models of public policy making. Routledge, London
Brunel C, Levinson A (2016) Measuring the stringency of environmental regulations. Rev Environ Econ Policy 10:47–67
Canton L, Soubeyran A, Stahn H (2008) Environmental taxation and vertical cournot oligopolies: how ecoindustries matter. Environ Resour Econ 40:369–82
Caron J, Fally T (2018) Per capita income, consumption patterns, and CO2 emissions. National Bureau of Economic Research, Cambridge, p w24923
Castro P, Hörnlein L, Michaelowa K (2014) Constructed peer groups and path dependence in international organizations: the case of the international climate change negotiations. Glob Environ Change 25:109–120
Cave LA, Blomquist GC (2008) Environmental policy in the European union: fostering the development of pollution havens? Ecol Econ 65(2):253–261
Chaney T (2008) Distorted gravity: the intensive and extensive margins of international trade. Am Econ Rev 98:1707–1721
Copeland B, Taylor MS (2004) Trade, growth and the environment. J Econ Lit 42:7–71
Costantini V, Crespi F (2008) Environmental regulation and the export dynamics of energy technologies. Ecol Econ 66:447–460
Costantini V, Mazzanti M (2012) On the green and innovative side of trade competitiveness? The impact of environmental policies and innovation on EU exports. Res Policy 41:132–153
David M, Nimubona AD, Sinclair-Desgagné B (2011) Emission taxes and the market for abatement goods and services. Res Energy Econ 33:179–191
David M, Sinclair-Desgagné B (2010) Pollution abatement subsidies and the eco-industry. Environ Resour Econ 45:271–282
de Melo J, Solleder JM (2020) Barriers to trade in environmental goods: how important they are and what should developing countries expect from their removal. World Dev 130:104910
De Santis R, Jona Lasinio C (2016) Environmental policies, innovation and productivity in the EU. Glob Econ J 16:615–635
Egger P, Larch M, Staub KE, Winkelmann R (2011) The trade effects of endogenous preferential trade agreements. Am Econ J: Econ Policy 3:113–143
Fally T (2015) Structural gravity and fixed effects. J Int Econ 97:76–85
Felbermayr GJ, Kohler W (2006) Exploring the intensive and extensive margins of world trade. Rev World Econ 142:642–674
Février P, Linnemer L (2004) Idiosyncratic shocks in an asymmetric Cournot oligopoly. Int J Ind Organ 22:835–848
Greaker M, Rosendahl KE (2008) Environmental policy with upstream pollution abatement technology firms. J Environ Econ Manag 56:246–259
He Q, Fang H, Wang M, Peng B (2015) Trade liberalization and trade performance of environmental goods: evidence from Asia-Pacific economic cooperation members. Appl Econ 47:3021–3039
Head K, Mayer T (2002) Illusory border effects: distance mismeasurement inflates estimates of home bias in trade. Centre d’Etudes Prospectives et d’Informations Internationales (CEPII). Working Paper No. 2002-01
Head K, Mayer T (2014) Gravity equations: workhorse, toolkit, and cookbook. In: Helpman Gopinath, Rogoff (eds) Handbook of International Economics. Elsevier, North Holland
Helpman E, Melitz MJ, Rubinstein Y (2008) Estimating trade flow: trading partners and trading volumes. Q J Econ 123:444–487
Hummels D, Klenow PJ (2005) The variety and quality of nation’s exports. Am Econ Rev 95:704–723
Klinge J, Birr-Pedersen K, Wier M (2003) Distributional implications of environmental taxation in Denmark. Fisc Stud 24:477–499
Kosonen K (2012) Regressivity of environmental taxation: myth or reality? In handbook of research on environmental taxation. Edward Elgar Publishing, Cheltenham
Leiter AM, Parolini A, Winner H (2011) Environmental regulation and investment: evidence from European industry data. Ecol Econ 70:759–770
Letchumanan R, Kodama F (2000) Reconciling the conflict between the pollution-haven’hypothesis and an emerging trajectory of international technology transfer. Res Policy 29:59–79
Levinson A (2009) Technology, international trade, and pollution from US manufacturing. Am Econ Rev 99:2177–2192
Levinson A, Taylor MS (2008) Unmasking the pollution haven effect. Int Econ Rev 49:223–254
Lovely M, Popp D (2011) Trade, technology, and the environment: does access to technology promote environmental regulation? J Environ Econ Manag 61:16–35
Martínez-Zarzoso IF, Nowak-Lehmann D, Horsewood N (2009) Are regional trading agreements beneficial? Static and dynamic panel gravity models. N Am J Econ Finance 20:46–65
Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71:1695–1725
Metcalf G (2009) Environmental taxation: what have we learned in this decade? In: Alan Viard (ed) Tax policy lessons from the 2000s. AEI Press, Washington, D.C
Mulatu A, Gerlagh R, Rigby D, Wossink A (2010) Environmental regulation and industry location in Europe. Environ Resour Econ 45(4):459–479
Muradian R, O’Connor M, Martinez-Alier J (2002) Embodied pollution in trade: estimating the ‘environmental load displacement’ of industrialised countries. Ecol Econ 41:51–67
Nimubona AD (2012) Pollution policy and trade liberalization of environmental goods. Environ Resour Econ 53:323–346
Novy D (2013) International trade without CES: estimating translog gravity. J Int Econ 89:271–282
OECD [Organization of Economic Cooperation and Development], (2006) É tude sur la politique commerciale. Biens et services environnementaux, Paris, France
Olivero MP, Yotov Y (2012) Dynamic gravity: theory and empirical implications. Can J Econ 45:64–92
Perino G (2010) Technology diffusion with market power in the upstream industry. Environ Resour Econ 46:403–428
Perino G, Requate T (2012) Does more stringent environmental regulation induce or reduce technology adoption? When the rate of technology adoption is inverted u-shaped. J Environ Econ Manag 64:456–467
Raimondi V, Scoppola M, Olper A (2012) Preference erosion and the developing countries exports to the EU: a dynamic panel gravity approach. Rev World Econ 148:707–732
Raspiller S, Riedinger N (2008) Do environmental regulations influence the location behavior of French firms? Land Econ 84(3):382–395
Rose AK, Spiegel MM (2010) International arrangements and international commerce. In: van Bergeijk PAG, Brakman S (eds) The gravity model in international trade advances and aplications. Cambridge University Press, Cambridge
Rubashkina Y, Galeotti M, Verdolini E (2015) Environmental regulation and competitiveness: empirical evidence on the porter hypothesis from european manufacturing sectors. Energy Policy 83:288–300
Santos Silva JMC, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88:641–658
Santos Silva JMC, Tenreyro S, Wei K (2014) Estimating the extensive margin of trade. J Int Econ 93:67–75
Sauvage J (2014) The Stringency of Environmental Regulations and Trade in Environmental Goods. OECD Working Paper, 2014-03
Schwartz S, Stahn H (2014) Competitive permit markets and vertical structures: the relevance of imperfectly competitive ecoindustries. J Public Econ Theory 16:69–95
Simmons B (2010) Treaty compliance and violation. Ann Rev Political Sci 13:273–296
Sinclair-Desgagné B (2008) The environmental goods and services industry. Int Rev Environ Resour Econ 2:69–99
Steenblik R (2005) Environmental goods: A comparison of the APEC and OECD lists, OECD Trade and Environment Working Papers 2005/4, OECD Publishing
Steinberg PF, VanDeveer SD (2012) Comparative environmental politics: theory, practice, and prospects. MIT Press, Cambridge
Sugathan M (2013). Lists of environmental goods: an overview. International Center for Trade and Sustainable Development. Available at http://www.ictsd.org/sites/default/files/research/2013/12/info_note_list-of-environmental-goods_sugathan.pdf
Tamini LD, Sorgho Z (2018) Trade in environmental goods: evidences from an analysis using elasticities of trade costs. Environ Resour Econ 70:53–75
Tosun J (2013) Environmental policy change in emerging market democracies: Eastern Europe and Latin America compared. University of Toronto Press, Toronto
Tsurumi T, Managi S, Hibiki A (2015) Do environmental regulations increase bilateral trade flows? BE J Econ Anal Policy 15:1549–1577
Van Long N, Soubeyran A (1997) Cost heterogeneity, industry concentration and strategic trade policies. J Int Econ 43:207–220
Vollenweider J (2013) The effectiveness of international environmental agreements. Int Environ Agreem: Politics, Law Econ 13:343–367
Zugravu-Soilita N (2018) The impact of trade in environmental goods on pollution: what are we learning from the transition economies’ experience? Environ Econ Policy Stud 20:785–827
Zugravu-Soilita N (2019) Trade in environmental goods and air pollution: a mediation analysis to estimate total, direct and indirect Effects. Environ Resour Econ 74:1125–1162
Wan R, Nakada M, Takarada Y (2018) Trade liberalization in environmental goods. Resour Energy Econ 51:44–66
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Lota D. Tamini gratefully acknowledges financial support from the FQRSC. The views expressed in the paper should not be attributed in any way to these funding agencies. The usual caveat about remaining errors applies.
Appendices
Appendix A. The Structural Gravity Equation
We need to specify the production technology used by firms of the polluting industry and market structure to obtain the structural trade equation. The profit of a polluting firm located in country j producing variety v is given by
where \(p_{j k}\) the output price prevailing in country k, \(q_{j k}\) the output quantity consumed in country k with \(q_{j} =\sum _{k}\tau _{j k} q_{j k}\) and with \(\tau _{j k}\) being the iceberg bilateral trade cost and \(c_{j} (v)\) the production cost. Each firm produces its variety under monopolistic competition.
Consumers have identical Cobb-Douglas preferences over differentiated products (supplied by the polluting industry) and a (non-tradable) homogeneous good (provided by a non-polluting industry). The homogeneous good is produced with a unit requirement in labour so that its price is equal to one. We posit a CES sub-utility function for the differentiated products. Hence, the utility function is given by
where \(\varepsilon\) is the constant elasticity of substitution and \(1>\mu >0\). The Cobb-Douglas upper tier of utility implies that consumers spend \(h_{j} =(1 -\mu _{j}) R_{j}\) on homogeneous goods, where \(R_{j}\) is the total income in country j. Demand for a variety v can be expressed as \(q_{j k} (v) =p_{j k} (v)^{ -\varepsilon } P_{k}^{\varepsilon -1} E_{k}\), where \(P_{k}\) is the price index, given by
where \(\Omega _{k}\) is the set of varieties available in country k and \(E_{k}\) is the expenditure level for the final good produced in country k (with \(E_{k} =\mu _{j} R_{j}\)). Hence, the sales of a firm producing in country j are given by
In each country, we assume that the production technology requires a single input, labour. Labour demand \(\ell _{j}\) is given by \(\ell _{j} =q_{j}/\kappa _{j} +f_{j}\), where the parameter \(\kappa _{j}\) represents the technological parameter and \(f_{j}\) is the fixed requirement in labour. The cost associated with production is given by \(c_{j} (v) =\sum _{k}(\tau _{j k} q_{j k}/\kappa _{j}) +f_{j}\). We assume that \(\tau _{j j} =1 <\tau _{j k}\) . Serving the domestic market implies lower trade costs.
Because firms produce under monopolistic competition, each producer sets its price and its demand for the EG, treating the price index \(P_{k}\) as given. The first-order conditions, given by d\(\pi _{j}/\)d\(p_{j k} =0\) and d\(\pi _{j}/\)d\(a_{j} =0\), lead to
The price is given by a constant markup \(\varepsilon /(\varepsilon -1)\) over the marginal cost of producing \(1/\kappa _{j} +t_{j} \xi _{v}\) times the marginal cost of exporting \(\tau _{j k}\). As expected, a higher tax rate raises the marginal cost and, in turn, the prices set by firms. Note that that the price of the final product (\(p_{j k}\)) does not vary among polluting firms located in the same country, even if their levels of emissions differ. Indeed, we assume that the marginal impact of production on emissions (\(\xi _{j}\)) does not vary among firms and that they have an identical technological parameter (\(\kappa _{j}\)).
We assume that the mass of labour units in each country is given by \(L_{j}\) and that \(1 -\mu _{j}\) is large enough that all countries produce this good in the open economy equilibrium. Hence, the mass of labour allocated to the production of the non-polluting good is \((1 -\mu _{j}) L_{j}\). In addition, we consider that labour is mobile across industries and is inelastically supplied. These assumptions imply a unit wage.
The free-entry condition in the downstream industry implies that \(\pi _{j} (v) =0\). Firms adopting an abatement technology have higher profits than do other firms, and firms enter the market as long as their profits without an abatement technology reach zero (we allow the two types of firms to coexist in equilibrium). Hence, \(\pi _{j} (v) =0\) implies \(\sum _{k}\left[ p_{j k} q_{j k} -(1/\kappa _{j} +t_{j} \xi _{j}) \tau _{j k} q_{j k}\right] =f_{j}\) . Using (36) yields
It is worth stressing that in equilibrium, the pollution intensity of a firm with an abatement activity is given by
so that its pollution intensity decreases with productivity.
We now determine the mass of polluting firms in each economy. We assume that there is no eco-industry in country j. Therefore, part of the total labour force in country j allocated to the polluting industry is \(\mu L_{j}\). The labour market clearing condition in country j implies that \(M_{j} (q_{j}/\kappa _{j} +f_{j}) +M_{j}^{e} \phi _{j} +M_{j} f_{e} =\mu L_{j}\) with \(M_{j}^{e} =\overline{\varphi }_{j}^{ -\gamma } M_{j}\). Using (37) and the labour market clearing condition in country j implies that the mass of firms is given by
It follows that \(M_{j}\) rises with \(t_{j}\) as \(\varepsilon -1 >0.\)
Total income in each country \(R_{j}\) is given by \(L_{j} +\Psi _{j}^{e}\), where \(\Psi _{j}^{e}\) is the total net gain associated with the use of EGs, given by \(\Psi _{j}^{e} =M_{j}^{e} \psi _{j}^{e} -M_{j} f_{e}\). Because \(\overline{\varphi }_{j}^{ -\gamma } \psi _{j}^{e} =f_{e}\) and \(M_{j}^{e} = \overline{\varphi }_{j}^{ -\gamma } M_{j}\) in equilibrium, we have \(R_{j} =L_{j}\text {. }\)
By inserting (9), (25), and (11) into (15 ), we obtain the export sales of EGs
Appendix B. Data Description
This study covers the period 1995-2012. The data cover bilateral trade flows of the EU-27 members and were collected at the HS6-digit level. Trade data on EGs are obtained from the UN Comtrade database referring to the EGs lists proposed by APEC and the OECD.Footnote 27 EGs trade is defined at the six-digit level using the harmonized system (HS6). As we exclude services, our sample includes 112 goods for the OECD list, 54 for the APEC list and 138 for the composite list (see Table 8).
Previous studies have found that trade elasticities with respect to transport costs and other transaction cost variables are sensitive to the method used to proxy transport costs (Head and Mayer 2002). We use the indicator suggested by Head and Mayer (2002) to proxy transport costs
where \(d_{gh}\) is the distance between the two subregions \(g\in i\) and \(h\in j\), while \(\omega _{g}\) and \(\omega _{h}\) represent the economic activity share of the corresponding subregion. The Centre d’Études Prospectives et d’Informations Internationales (CEPII) uses the above formula to create a dataset. Data on language, legal system and sharing a common border also come from the CEPII database. Total consumption of EGs is calculated using the formula
where \(\hbox {Production}_{{j}}\) is industrial production in the EGs industry located in country j, \(\hbox {Export}_{{j}}\) is total exports of EGs and \(\hbox {Import}_{{j}}\) is total imports of EGs. Data on production come from the United Nations Industrial Development Organization (UNIDO) Statistical Databases.Footnote 28 Our dataset for environmental treaties is constructed using the Environmental Treaties and Resource Indicators (ENTRI) dataset produced by Columbia University.Footnote 29 The GDP, population, land area, and trade openness index variables are collected from the World Development Indicators Database of the World Bank.Footnote 30 Table 9 reports some descriptive statistics.
Appendix C. Alternative Measures of Extensive Margin of Trade
Appendix D
Rights and permissions
About this article
Cite this article
Gaigné, C., Tamini, L.D. Environmental Taxation and Import Demand for Environmental Goods: Theory and Evidence from the European Union. Environ Resource Econ 78, 307–352 (2021). https://doi.org/10.1007/s10640-020-00534-w
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-020-00534-w