We analyze the impact of trade in a differentiated good on environmental policy when there is local and transboundary pollution. In autarky, the (equivalent) pollution tax is set equal to the marginal damage from own emissions. If the strategic policy instrument is a tax, leakage occurs under trade and tends to lower the tax. The net terms of trade effect, due to the exportable and importable varieties of the differentiated good, tends to increase the tax. We derive conditions under which pollution taxes under trade are higher than the marginal damage from own emissions, i.e., higher than the Pigouvian tax and than that under autarky. Then, pollution falls under trade relative to autarky. When countries use quotas/permits to regulate pollution, there is no leakage, while the net terms of trade effect tends to make pollution policy stricter. The equivalent tax is always higher than the marginal damage from own emissions, i.e., always higher than the Pigouvian tax and than that under autarky; hence, pollution always falls under trade. Our analysis provides some insight into the findings in the empirical literature that trade might be good for the environment.

An open-economy equilibrium model is derived to investigate the effects of energy policy on the U.S. economy, with emphasis on corn-based ethanol. A second best policy of a fuel tax and ethanol subsidy is found to approximate fairly closely the welfare gains associated with the first best policy of an optimal carbon tax and tariffs on traded goods. The largest economic gains to the U.S. economy from these energy policies arise from their impact on U.S. terms of trade, particularly in the oil market. Conditional on the current fuel tax, an optimal ethanol mandate is superior to an optimal ethanol subsidy.

Tariff-rate quotas (TRQs) have replaced quotas at the end of the Uruguay Round. We analyze TRQs when a foreign firm competes against a domestic firm in the latter's market. Our benchmark is the strategic rent-shifting tariff. We show that the domestic price-equivalent TRQ is a better instrument welfare-wise, as it can extract all of the rents from the foreign firm. We show that different pairs of within-quota tariff and quota can support full rent extraction. The implication is that reduction of the former and enlargement of the latter, holding the above-quota tariff constant, may have no liberalizing effects. The first-best TRQ and the strategic tariff generate different prices. When firms have identical and constant marginal cost, the first-best TRQ entails selling a subsidy to the foreign firm and forcing the exit of the domestic firm.

Significant government support for biofuels has led to rapid growth in U.S. ethanol production and research to develop more advanced biofuels. In this paper we construct a general equilibrium, open economy model that captures the rationale typically invoked to justify government intervention in this setting: to alleviate the environmental impact of energy consumption and to decrease U.S. energy dependence on foreign sources. The model is used to study both the positive and normative implications of alternative policy instruments, including the subsidies and mandates specified by the 2007 Energy Independence and Security Act. From a positive perspective, we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral. From a welfare perspective, we show that biofuels mandates dominate biofuels subsidies, and that combining fuel taxes (rather than subsidies) with mandates would be welfare enhancing.

This paper studies the firm-level relationship between decision to export and environmental performance. To guide the empirical work, we introduce environmental pollution and technology choice into a trade model with heterogeneous firms. The model predicts that a productive firm is more likely to adopt emission-saving technology and to export. Using facility-level criteria air emission data in the U.S. manufacturing industry, for a variety of pollutants, empirical tests are supportive of our two primary theoretical predictions. First, facility productivity is negatively correlated with emission intensity, measured by emissions per value of sales. Second, conditional on the estimated facility productivity and the facility's exposure to environmental regulation, exporters have lower emission per value of sales than non-exporters within the same industry.

We employ an open economy general equilibrium model to investigate the effects of government energy policy, with an emphasis on corn-based ethanol, on the U.S. economy. The model specification incorporates world and domestic markets, assumes pollution costs from fuel consumption, and allows endogenous determination of equilibrium quantities and prices for oil, corn and ethanol. The model is calibrated to represent a recent benchmark data set for 2009 and is used to simulate the positive and normative effects of alternative policies. We find that a second best policy of a fuel tax and ethanol subsidy approximates fairly closely the welfare gains associated with the first-best policy of an optimal carbon tax and tariffs on traded goods. The largest economic gains to the U.S. economy from these energy policies arise from the impact of the policies on U.S. terms of trade, particularly in the oil market. We also find that, conditional on the current fuel tax, an optimal ethanol mandate is superior to an optimal ethanol subsidy. In the benchmark case, the optimal ethanol mandate is about 18 billion gallons.

This article assesses the main welfare implications of US policies to support biofuels, with an emphasis on corn-based ethanol. The analysis relies on an open economy, multimarket equilibrium model that links world and domestic energy and agricultural markets and explicitly accounts for the externalities of carbon emissions. The first-best policy in our context entails a carbon tax (implemented with a tax on fuel and a subsidy for ethanol), an import tariff on oil, and an export tax on corn. Although this policy is likely not feasible, we show that a second- best policy with an optimally chosen fuel tax and ethanol subsidy can approximate fairly closely the welfare gains associated with the first-best policy. The largest welfare gains to the US economy from first- and second-best policies arise from their impact on the terms of trade, particularly in the oil market.

This paper provides an overview of the economics of biofuels. It starts by describing the remarkable growth of the biofuel industry over the last decade, with emphasis on developments in the United States, Brazil and the European Union, and it identifies the driving role played by some critical policies. After a brief discussion of the motivations that are commonly argued in favor of biofuels and biofuel policies, the paper presents an assessment of the impacts of biofuels from the economics perspective. In particular, the paper explains the basic analytics of biofuel mandates, reviews several existing studies that have estimated the economic impacts of biofuels, presents some insights from a specific model, and outlines an appraisal of biofuel policies and the environmental impacts of biofuels. The paper concludes with an examination of several open issues and the future prospects of biofuels.

We analyze non-cooperative environmental policy when the only strategic interaction between countries is through bilateral transboundary pollution, i.e., countries are closed or small open economies. When countries set pollution taxes simultaneously, there is no carbon leakage. However, in the sequential-move game, the leader sets its pollution tax lower than the marginal damage from own pollution and lower than that in the simultaneous-move game, while the follower sets its tax higher than that in the simultaneous-move game. The only motive behind the leader's underregulation of own pollution is to reduce the incidence of transboundary pollution from the follower, i.e., to reduce carbon leakage. Aggregate pollution is higher in the sequential-move game than in the simultaneous-move game if pollution is a pure global public bad.

The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known. This article extends the analysis to multi-market oligopoly. Provided all ad valorem taxes are positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, it is shown that ad valorem taxes dominate in multi-product equilibrium. We discuss the role of unit cost covariances across multi-product firms in determining the extent of cost efficiencies arising under ad valorem taxation. The issue of merger under oligopoly is also considered. Conditions are identified under which a merger increases the sum of consumer and producer surpluses while also increasing the revenue yield from a set of unit taxes. If not all firms are active in all considered markets, then it is also shown that additional conditions are required to ensure the dominance of ad valorem taxes. In multi-input Cournot oligopsony, however, unit taxation welfare dominates. This is because ad valorem taxes on inputs reduce demand elasticities, amplifying market power distortions.