Environmental regulation, trade integration and cooperation

Transcription

1 Environmental regulation, trade integration and cooperation Lisa Anouliès Graduate Students' in International Economics Lunch Seminar PSE - March 23, 2009

2 Introduction Introduction Motivation Literature Contributions and results The model Consumption Production Pollution and environmental policy The market equilibrium The xed-cost case The variable-cost case The environmental policy The cooperative equilibrium The Nash equilibrium The comparison of equilibria Conclusion

3 Introduction Motivation Climate warming is a major issue of international politics "Given the nature and magnitude of the challenge, national action alone is insucient. No nation can address this challenge on its own. No region can insulate itself from these climate changes. That is why we need to confront climate change within a global framework, one that guarantees the highest level of international cooperation." Ban Ki-Moon, Secretary General of the United Nations 24 September, 2007 There is a strong and recurrent opposition between countries about the denition of precise commitments of greenhouse gases emissions reductions

4 Introduction Motivation How important is international cooperation on global environmental matters? What are the ecological and economic impacts of the dispersion of pollution-control eorts? How does cooperation on environmental issues between trade partners aect the welfare impact of trade liberalization?

5 Introduction Literature Dierent frameworks used to study interdependencies between the environment and the economic activity Perfect competition Markusen (1975): countries may want to substitute environmental taxes for trade policy to improve their terms-of-trade Oligopoly There are incentives for a strategic use of environmental policies, which can result in ecological dumping (cooperative regulation stricter than unilateral policy) to shift rents toward domestic rms (Rauscher (1994)) to attract capital (Hoel (1997))

6 Introduction Literature Dierent frameworks used to study interdependencies between the environment and the economic activity Monopolistic competition Püger (2001): there is a trade-o between more economic activity and less local pollution, which does not necessarily lead to ecological dumping Haupt (2006): non cooperative environmental standards can be too tough when pollution is local, because they reduce the number of varieties produced Gurztgen and Rauscher (2000): there is a leakage eect (an undesirable outcome of a national environmental policy on foreign pollution) specic to monopolistic competition, which occurs through a modication of market structure

7 Introduction Contributions and results Contributions To a basic model of the new trade theory (Helpman and Krugman (1985)) we add: pollution: emissions are released during the production of every varieties of a dierentiated product environmental policy: governments can impose production process standards to polluting rms (like in Haupt (2006)) Contributions: consideration of pollution as a global externality introduction of trade costs explicit study of the strategic game between countries on environmental standards interaction between environmental and trade policies

8 Introduction Contributions and results Results The market-structure leakage eect can undermine the eectiveness of a national environment-friendly policy The non cooperative equilibrium is characterized by suboptimal environmental regulation Trade liberalization is welfare improving only if countries cooperate on environmental matters

9 The model Introduction Motivation Literature Contributions and results The model Consumption Production Pollution and environmental policy The market equilibrium The xed-cost case The variable-cost case The environmental policy The cooperative equilibrium The Nash equilibrium The comparison of equilibria Conclusion

10 The model Consumption We consider two developed countries (home and foreign) identical in size, tastes and technologies. The home representative consumer's utility function (U): U = lnc ηe η > 0 C : consumption of goods (U C > 0 and U CC < 0) E : global environmental damage (the world-wide amount of polluting emissions) (U E < 0 and U EE = 0) η: the marginal disutility of pollution

11 The model Consumption 1rst stage of demands determination The consumption index: C = H 1 µ D µ 0 < µ < 1 H: consumption of a homogeneous good D: consumption of a basket of all existing varieties of a dierentiated product The budget constraint: w = H + PD w : wage rate in the home country P: price index of the basket of varieties of the dierentiated good the homogeneous good's world price is one Individual demands: H = (1 µ) w and D = µw P

12 The model Consumption 2nd stage of demands determination The dierentiated good index: [ σ 1 σ D = nd + n σ 1 σ d h f ] σ σ 1 n: number of varieties produced by home (n : by foreign) d h : home consumption of each home variety (d f : foreign variety) σ > 1: constant elasticity of substitution The corresponding price index: P = [np 1 σ + n (τ p ) 1 σ] 1 1 σ p: production price of varieties produced by home (p : by foreign) τ > 1: iceberg transport costs Individual demands: d h = µwp σ P σ 1 and d f = µw (τ p ) σ P σ 1

13 The model Production The homogeneous good Only one factor of production: labor mobile within countries internationally immobile The homogeneous good: perfect competition one unit of labor per unit of good production in both countries after free trade unique world price = 1 w =w = 1

14 The model Production The dierentiated good The total cost expressed in labor terms, l, associated to the production of q units of a home variety: l = f + vq f : xed cost of production v : variable cost of production Two equilibrium conditions in monopolistic competition: production price: p = σ σ 1 v output: q = (σ 1) f v

15 The model Pollution and environmental policy The environmental policy Command-and-control policy: denition of the emission rate (the amount of pollutants released per unit of output) Complying with environmental standards is costly for rms; the regulation can aect alternately: the xed cost of production: f = 1 + f env and f = 1 + f env the variable cost of production: v = 1 + v env and v = 1 + v env

16 The model Pollution and environmental policy The xed-cost case R&D expenses to set-up and design a cleaner production process The abatement function: τ ef = f α with α < 0 The more environment-friendly the country, the lower the emission rate, the higher the xed cost of production Equilibrium conditions become: production price: p = p = pf = σ σ 1 outputs: qf = (σ 1) f and qf = (σ 1) f

17 The model Pollution and environmental policy The variable-cost case Expenses devoted to pollution-control activities all along and at the end of the production line The abatement function: τ ev = v β with β < 0 The more environment-friendly the country, the lower the emission rate, the higher the variable cost of production Equilibrium conditions become: production prices: pv = σ σ 1 v and p v = σ σ 1 v outputs: qv = (σ 1) 1 and q v v = (σ 1) 1 v

18 The market equilibrium Introduction Motivation Literature Contributions and results The model Consumption Production Pollution and environmental policy The market equilibrium The xed-cost case The variable-cost case The environmental policy The cooperative equilibrium The Nash equilibrium The comparison of equilibria Conclusion

19 The market equilibrium The market equilibrium The equilibrium numbers of varieties produced in each region solve market clearing conditions: for each variety, output must be equal to the sum of all individual consumptions: { q = Ldh + L τ d h q = Lτ d f + L d f We assume identical country size (L = L ) Iceberg transport costs represent an indirect demand (quantities lost in the transit have to be taken into account)

20 The market equilibrium The xed-cost case The xed-cost case - The market equilibrium The equilibrium numbers of varieties are: n f = µl σ (1+φ 2 )f 2φf (f φf )(f φf ) and n f = µl with φ = τ 1 σ the freeness of trade σ (1+φ 2 )f 2φf (f φf )(f φf ) When the regions are perfectly integrated (φ = 1) rms can't face a negative dierential of environmental policy Having both the numbers of home and foreign rms non negative impose the following condition: 2φ 1+φ 2 F 1+φ2 2φ and F = f /f

21 The market equilibrium The xed-cost case The xed-cost case - The environmental damage The amount of worldwide polluting emissions is: E f = n f τ ef q f + n f τ e f q f = (σ 1) (n f + n f ) = (σ 1) µl σ (1 φ) 2 (f + f ) (f φf ) (f φf ) We set α = 1: emissions per rm are simply equal to σ 1, whatever their size Upgrading national environmental standard: lowers the number of rms in the country increases their size increases the number of foreign rms Firm reallocation induces a leakage eect which can undermine the eectiveness of a national environmental policy

22 The market equilibrium The variable-cost case The variable-cost case - The market equilibrium The equilibrium numbers of varieties are: n v = µl σ and n v = µl σ (1+φ 2 )v 1 σ 2φv 1 σ (v 1 σ φv 1 σ )(v 1 σ φv 1 σ ) v 1 σ (1+φ 2 )v 1 σ 2φv 1 σ (v 1 σ φv 1 σ )(v 1 σ φv 1 σ ) v 1 σ We can make similar observations to the previous scenario: Firms which have to face the toughest national environmental policy are not able to cope with international competition without protection Having both the numbers of home and foreign rms non negative impose the following condition: ( ( ) 1 σ 1 σ 1 V and V = v/v ) 1 2φ 1+φ 2 1+φ 2 2φ

23 The market equilibrium The variable-cost case The variable-cost case - The environmental damage The environmental damage is: E v = n v τ ev q v + n vτ e v q v = (σ 1) ( n v /v 2 + n v/v 2) To be able to compare the results, we assume β = 1 A tougher national environmental policy: decreases domestic rms' output decreases domestic rms' emission rate modies the repartition of rms between the two countries to the benet of the foreign country There are leakage eects through a modication of the market structure; the overall eect is ambiguous

24 The environmental policy Introduction Motivation Literature Contributions and results The model Consumption Production Pollution and environmental policy The market equilibrium The xed-cost case The variable-cost case The environmental policy The cooperative equilibrium The Nash equilibrium The comparison of equilibria Conclusion

25 The environmental policy Two policy scenarios The endogenous choice of environmental standards rests on consumers' welfare. Two political options are considered: Cooperation: a supranational authority is in charge of the design of an international agreement on environmental standards ( cooperative equilibrium) Unilateralism: governments simultaneously choose their own standard, considering the foreign policy as given ( Nash equilibrium)

26 The environmental policy The cooperative equilibrium Optimal environmental policies maximize the worldwide representative consumer's utility: [ ] 1 f coop = 2ηL(σ 1)2 σ and v coop = 4ηL(σ 1) 2 σ Then we have: [ = ln c U fcoop and U vcoop = ln ( ) µ σ(1+φ) 2η(σ 1) 2 [ Trade liberalization: ] σ 1 µ σ 1 c (L (1 + φ)) µ σ 1 ( σ 4ηL(σ 1) ) µ ] 2 µ 2 does not inuence the environmental standard does not aggravate the global environmental damage benets to consumers since imported varieties become cheaper Liberalization is welfare improving

27 The environmental policy The Nash equilibrium Governments do not cooperate and simultaneously choose their standard as the one which maximizes the domestic representative consumer's utility: f nash = ηl(σ 1)2 (1 φ) σ and v nash = Then we have: [ ( = ln c U fnash and U vnash = ln σ(1+φ) η(σ 1) 2 (1 φ) [ ) µ ] σ 1 c (L (1 + φ)) µ σ 1 ( [ ] 1 2ηL(σ 1)(1 φ) 2 σ 2µ (σ 1)(1 φ) σ 2ηL(σ 1)(1 φ) ) µ 2 ] µ 1 φ

28 The environmental policy The Nash equilibrium Trade liberalization: softens the environmental protection (strategic use of environmental policy) aggravates the global environmental damage benets to consumers: xed-cost case: a greater number of varieties to be consumed variable-cost case: a lower production price in both cases: imported varieties become cheaper what is the strength of consumption gains relative to poorer environmental quality? xed-cost case: utility unambiguously decreases variable-cost case: utility decreases, except for small levels of competition and openness Liberalization is welfare depressing (in most cases)

29 The environmental policy The comparison of equilibria The comparison of equilibria Environmental policies: f coop f nash = 2 1 φ > 1 and v coop v nash = ( 2 1 φ ) 1 2 > 1 Individual actions create incentives to relax national environmental policies to help the domestic industry to face foreign competitors; the strategic use of environmental regulations generates a race to lower standards Utilities: [ U fcoop U fnash = µ 1+φ σ 1 1 φ ln ( [ 1+φ 2 1 φ 1 φ ln ( )] > 0 )] 2 > 0 and U vcoop U vnash = µ 2 1 φ To the extend that we deal with global pollution, it is quite logical to nd that the answer must also be global

30 The environmental policy The comparison of equilibria The impacts of trade liberalization Environmental policies: δ(f coop/f nash ) δ(v δφ > 0 and coop/v nash ) δφ > 0 Growing competitive concerns as liberalization goes on increases the gap between cooperative and Nash equilibrium Utilities: δ(u fcoop U fnash ) δ(u vcoop U vnash ) δφ > 0 and δφ > 0 As a consequence, we nd that the more integrated the regions, the larger the gap between utilities

31 Conclusion Introduction Motivation Literature Contributions and results The model Consumption Production Pollution and environmental policy The market equilibrium The xed-cost case The variable-cost case The environmental policy The cooperative equilibrium The Nash equilibrium The comparison of equilibria Conclusion

32 Conclusion Summary of results In a country, rising environmental standards improves the environmental quality at the expense of the economic activity; the reallocation of rms abroad creates a leakage eect which can eventually undermine national pollution-control eorts Due to strategic considerations, the non cooperative equilibrium is characterized by suboptimal environmental regulation; the welfare cost of non cooperation increases with trade liberalization Trade liberalization is welfare improving only when countries do cooperate on environmental matters