Trade liberalization, transboundary pollution, and market size

Rikard Forslid, Toshihiro Okubo, Mark Sanctuary

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)


This paper uses a monopolistic competitive framework to study the impact of trade liberalization on local and global emissions. We focus on the interplay of asymmetric emission taxes and the home market effect and show how a large-market advantage can counterbalance a high emission tax, so that trade liberalization leads firms to move to the large high-tax economy. Global emissions decrease when trade is liberalized in this case. We then simulate the model with endogenous taxes. The larger country, which has the advantage of the home market effect, will be able to set a higher Nash emission tax than its smaller trade partner yet still maintain its manufacturing base. As a result, a pollution haven will typically not arise in this case as trade is liberalized. However, global emissions increase as a result of international tax competition, which underscores the importance of international cooperation as trade becomes freer.

Original languageEnglish
Pages (from-to)927-957
Number of pages31
JournalJournal of the Association of Environmental and Resource Economists
Issue number3
Publication statusPublished - 2017 Sept 1


  • Abatement
  • Emissions
  • Home market effect
  • International trade
  • Pollution haven

ASJC Scopus subject areas

  • Economics and Econometrics
  • Nature and Landscape Conservation
  • Management, Monitoring, Policy and Law


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