The effect of environmental taxes on the volume of international trade

This paper is a response to Ropke's (1994) question whether environmental taxes increase or decrease the volume of international trade. Using a three-country Heckscher-Ohlin-Samuelson model, it is shown that the effect can be in either direction. In the absence of pollution haven and three-country effects that reverse natural comparative advantage, environmental taxes decrease (increase) the volume of trade between any two countries when the tax is larger in the country that exports (imports) the pollutive good. The environmental tax can also generate strong trade effects between two of the countries, changing production costs and thereby reversing the expected tax effect on a third country. The effects on trade are likely to be smaller when comparable pollution damage is global rather than local. (C) 2000 Elsevier Science B.V. All rights reserved.