Can the terms of trade externality outweigh free-riding? The role of vertical linkages

Abstract

a b s t r a c tThis paper analyzes the impact of vertical linkages on the international effects of environmental policy. With vertical linkages, stricter environmental policy at home indirectly reduces pollution in the rest of the world. This spillback effect can reinforce the free-rider problem that arises under strategic interaction. When pollution is transboundary a race to the bottom ensues, despite the fact that vertical linkages make it easier for national regulators to export the costs of environmental policy via the terms of trade. We also find that while trade liberalization can be good for the environment, vertical linkages tend to increase global pollution.

On the effects of unilateral environmental policy on offshoring in multi‐stage production processes

“…Similar to Baylis et al. () and Bogmans (), we found an instance of negative leakage in parts of our economy. But note that the ω ‐schedule is increasing in z .…”

“…Depending on the magnitude of this factor price effect, it is possible that in industries with low emission intensity the wage effect dominates the emission cost effect such that the new equilibrium upstream industry z > z and upstream industries previously located in South move to North. Similar to Baylis et al (2014) and Bogmans (2015), we found an instance of negative leakage in parts of our economy. But note that the ω-schedule is increasing in z.…”

“…Recently some authors started to explore the role of intermediates and global supply chains more intensively. Closest to our study is the paper by Bogmans (2015), which shows how through input-output networks effects of unilateral environmental policy can spillover to other countries. Böhringer et al (2015) show how border carbon taxes can have unintended side effects for export industries that rely on imported emission-intensive intermediates.…”

“…Recently some authors started to explore the role of intermediates and global supply chains more intensively. Closest to our study is the paper by Bogmans (), which shows how through input–output networks effects of unilateral environmental policy can spillover to other countries. Böhringer et al.…”

Revisiting Carbon Leakage

“…This is triggered by a reduction of relative factor prices due to the relocation of more emission-intensive upstream producers to the less regulated region. Bogmans (2015) show that by reducing the net supply of intermediate goods to world markets, stricter unilateral environmental policy can have negative global supply effects, thereby reducing emissions abroad. Perino et al (2019) examine unilateral abatement policies within a group of countries that has a carbon-pricing system (such as the EU ETS).…”