Environmental regulation in an open economy

Abstract

Environmental regulation by a large trading country affects the world price of traded commodities. A series of second-best environmental taxes are derived which explicitly incorporate trade effects for cases which depend on the type of externality, the regulating country's commodity trade balance, and the presence or absence of trade taxes in the regulated market. A coordinated policy solution using both tax and tariff instruments also is derived. The practical implications for domestic environmental policy-making which emerge from the theoretical results are evaluated. © 1991.