Tariffs and Environmental Taxes in the Presence of Environmental R&D

Tsung Hsiu Tsai, Kuang I. Tu, Jiunn Rong Chiou

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

It is generally held that trade liberalization results in less-stringent environmental regulations, which suggests that policies regulating trade and the environment are positively correlated. This paper examines whether this monotonic relationship still holds true when pollution-reducing environmental research and development (ER&D) is undertaken by the home firm in a duopoly market. The link between tariffs and environmental taxes is examined under three possible scenarios—namely, when the home government has: (i) a tariff instrument only; (ii) an environmental tax instrument only; and (iii) both regulatory instruments, to correct for distortions relating to trade and the environment. We find that if it is not possible to abate pollution completely through ER&D, then the monotonic relationship between tariffs and environmental taxes is sustained. However, if it is possible to fully abate pollution through ER&D, then the optimal tariff (environmental tax) may not increase monotonically with taxes (tariffs). When both environmental taxes and tariffs are employed, these two policies may be strategic substitutes. A positive relationship between tariffs and environmental taxes may not be applicable.

Original languageEnglish
Pages (from-to)413-431
Number of pages19
JournalEnvironmental and Resource Economics
Volume60
Issue number3
DOIs
StatePublished - Mar 2014

Keywords

  • Environmental R&D
  • Environmental taxes
  • Tariffs
  • Trade and environment
  • Trade liberalization

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