Monday, November 28, 2016

Trade Costs, CO2, and the Environment

This paper quantifies how international trade affects CO2 emissions and analyzes the welfare consequences of regulating the CO2 emissions from shipping. To this end, the paper describes a model of trade and the environment, compiles new data on the CO2 emissions from shipping, and estimates key parameters using panel data regressions. Results show that the benefits of international trade exceed trade's environmental costs due to CO2 emissions by two orders of magnitude. While proposed regional carbon taxes on the CO2 emissions from shipping would increase global welfare and increase the implementing region's GDP, they would also harm poor countries.
All three counterfactual policies increase social welfare globally, albeit by small amounts. In each case, the gains from trade fall slightly, but the environmental costs of trade due to CO2 fall even more. In total, social welfare increases by about $1 billion over a decade for the EU policy, $7 billion for the US policy, and $10 billion for a global policy. While these effects are positive, they are small in magnitude and do not exceed two tenths of a basis point relative to baseline levels of global income. While the median country is actually harmed by the regional policies ... the positive benefits to GDP in the implementing region more than offset these losses elsewhere.
Regulations benefit wealthy countries but actually decrease welfare in poor countries.... The richest third, which had 2007 GDP per capita above $14,000; the middle third, which had 2007 GDP per capita of $2,400 to $14,000; and the bottom third, which had 2007 GDP per capita below $2,400. The global policy increases welfare in the richest third of countries by half a basis point, decreases welfare in the middle third of countries by three quarters of a basis point, and decreases welfare in the poorest third of countries by 1.3 basis points. The EU and US counterfactual policies generate similar patterns but with smaller magnitude effects
by Joseph S. Shapiro
American Economic Journal: Economic Policy
Volume 8, Number 4; November, 2016; pages 220-254
The full article is currently available free of charge at

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