We consider an open to trade two-country model with two vertically di¤erentiated goods and relative preferences in consumption. These preferences are such that consumers obtain satisfaction from their own consumption in relation to the consumption of the others. Product di¤erentiation is along an environmental quality dimension and countries are asymmetric in average income. Analyzing the equilibrium con…guration, we …nd that, when relative preferences are relegated to the poorer country producing the brown good, the process of trade liberalization can favor the polluting …rm, while penalizing the green rival. In these circumstances, trade liberalization can be environmentally detrimental. At the opposite, trade liberalization always favors the green producer when relative preferences are observed in both countries, with possibly positive e¤ects on global emissions.

Inspired by the so-called polluter pays principle, environmental taxes can drive a more sustainable European market. However, unilateral mitigation measures can reduce the competitiveness of carbon-intensive industries, thereby inducing relocation. In this paper, we wonder whether a tax can effectively curb emissions without hurting firms. Our analysis's entry point is that the level of emissions in a region is jointly determined by (i) the number of consumers buying dirty goods and (ii) the environmental quality of these products. Thus, to curb emissions, on the one hand, firms have to reduce their goods' emissions intensity. On the other hand, consumers have to reduce the consumption of dirtier goods. This leads to defining a tax depending on the number of consumers buying the brown products and the relative quality of these products. We show that under this tax, lower emissions do not come at the expense of lower profits.

In this paper, under the assumption that green consumption has (at least partially) a social/psychological dimension, we analyse the effect of a carbon tax when it is imposed on consumers buying dirty products rather than on polluting firms. The amount of the tax paid is determined by the share of brown consumers in the market and the quality gap between variants. We show that this tax can abate emissions without inducing the undesirable relocation effect which can be observed in the case when a unilateral climate policy is imposed on polluting producers.

No abstract