Whether to Abolish or Introduce Dual Regulation as Trade and Environmental Policy?

Abstract

China, which has already introduced an environmental tax in an effort to decarbonize, has recently begun emissions trading and is using two environmental policies in tandem, but there are concerns about the impact on growth and trade. Trade and environmental policies affect firms' entry and exit, resulting in changes in aggregate productivity and pollution emissions. This study compares the impacts of single regulation and dual regulation on welfare, using a research‐and‐development based growth model with heterogeneous firms. Under single regulation, the cleansing effect of trade liberalization could be undermined. Under dual regulation, trade liberalization decreases pollution and improves average productivity whereas decreasing total permits reduces pollution. From the perspective of improving welfare it is desirable to choose dual regulation because trade liberalization can reduce total pollution emissions via the cleansing effect of trade liberalization.