Environmental Impacts on Optimal Trade Policies
By Chi-Chur Chao and Eden S. H. Yu
ABSTRACT
This paper examines the impacts of a tightening of the environmental regulations on optimal trade and investment policies. We find that for a small open capital-importing country, a more stringent environmental measure leads to a higher optimal tariff and possibly a higher optimal tax on foreign capital. This result holds whether or not there are capital tax credits in the foreign source country. It is also found that when a tax credit is in place, multiple equilibria of optimal policies may exist if a subsidy in lieu of a tax is provided to foreign capital.
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