DP9412 Trade, Transboundary Pollution and Market Size

Author(s): Rikard Forslid, Toshihiro Okubo, Mark Sanctuary
Publication Date: March 2013
Keyword(s): market size, trade liberalization, transboundary pollution
JEL(s): F12, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9412

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 at the sector level are relevant variables for empirical studies on trade and pollution.