Environmental Taxation in Open Economies: Unilateralism or Partial Harmonization

There are two reasons why countries might set weak environmental policies: transboundary pollution and concerns for competitiveness. This article explores the full interactions between these two features within a unified general equilibrium framework. First, we show that competitive concerns change the structure of output taxes but not that of emission taxes. They lead to a lowering of output taxes, lower polluting good prices, an increase in emission taxes, adoption of less (or same) polluting technologies, increased aggregate emissions, and lower overall welfare levels. Second, we show that partially harmonizing commodity taxes, above their unrestricted Nash equilibrium value, can potentially hurt as well as improve the pollution technology, overall quality of the environment and welfare. The three attributes move positively together. On the other hand, harmonizing of emission taxes above their Nash equilibrium values appear to always lead to improvements in the environment and welfare via adoption of cleaner technologies.