Essays in International Trade and Environmental Policy

This thesis comprises a collection of three essays on international trade and environmental policy. In Chapter 1, I examine Britain’s trade policy in the 19th-century. Britain, the dominant trading nation of the time, abolished protectionist import tariffs in the middle of the century. To quantify the effect of this shift in trade policy on Britain’s welfare, I employ a general equilibrium trade model with multiple industries and input-output linkages. Relying on a novel dataset of trade flows and import tariffs of Britain and its main trading partners, I show that trade liberalization improved Britain’s overall welfare. This result is driven by the increased volume of trade. Although its terms of trade deteriorated, Britain benefited as its tariff structure became less restrictive over the period. In Chapter 2, I present an analysis of Canada’s commitment under the Paris Agreement. I examine the effects of meeting the emission reduction target as described in Canada’s Nationally Determined Contribution on welfare, bilateral trade and carbon leakage at the provincial and national level. To do this, I incorporate pollution emissions as a by-product of production into a general equilibrium trade model. Provinces substantially vary in terms of their economic structures and emissions profiles, therefore the effects of a national environmental policy differ at the regional level. By considering interprovincial trade and linkages across industries, the results provide a comprehensive understanding of how the industry level effects of a national target are transmitted through the Canadian economy and inform the policy in terms of the “emission intensive and trade exposed” industries at the provincial level. Meeting the Paris Agreement target decreases aggregate Canadian output by 0.48% but the provincial effects vary primarily due to differences in emissions intensity of production. Finally, the policy leads to 10.8% of emissions to relocate out of Canada but the proposed Output-Based Pricing System partly alleviates the problem of carbon leakage. In Chapter 3, using a general equilibrium trade model with cross-border pollution externalities from production, I evaluate the potential for carbon tariffs as an instrument to enforce the commitments under the Paris Agreement. Employing a non-cooperative optimal policy framework, I investigate the strategic interactions across five regions, Canada, China, the European Union, the United States and the rest of the world. In light of the debates following the possible withdrawal of the United States from the Paris Agreement, the analysis specifically focuses on the effects of welfare-maximising carbon tariffs on imports from the United States. I find that optimal carbon tariffs at the industry level result in small reductions in the total emissions and real income of the United States but are not sufficient to enforce participation in emission mitigation efforts. Compared to meeting its emission reduction targets, the United States is better off by withdrawing from the Paris Agreement, bearing the cost of carbon tariffs and retaliating in response. The committing regions are worse off when the United States retaliates. The results show that the negative effects of a worldwide tariff war on real incomes are substantially larger than the compliance cost to the Paris Agreement for all regions.

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