Environmental policy and international trade: Are policy differentials optimal?

In policy circles there is an ongoing debate concerning the preferential treatment of exposed sectors in the economy in the design of environmental policy to avoid a possible loss of competitiveness. The issue has also been addressed in several studies in the economic literature. We briefly survey this literature emphasising the role of market structures. We show that locally, starting from a general equilibrium with Pigouvian emissions taxation, it is optimal to increase the emissions tax on the exposed sectors in the large country case, and that the same is likely to hold in case of Cournot competition. These results are confirmed in numerical exercises where global optimal policies are calculated.