Trade and the Environment: The Role of Firm Heterogeneity

In this paper, we derive a new effect of trade liberalization on the quality of the environment. We show that in the presence of heterogeneous firms, the aggregate volume of emissions is influenced by a reallocation effect resulting from an increase in the relative size of more productive firms. The...

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Bibliographic Details
Published in:Review of international economics 2014-05, Vol.22 (2), p.209-225
Main Authors: Kreickemeier, Udo, Richter, Philipp M.
Format: Article
Language:English
Subjects:
Air pollution
Carbon emissions
Economic theory
Effects
Emissions
Enterprises
Environment
Environmental economics
Literature
Pollution
Productivity
Studies
Tariff reductions
Tariffs
Trade liberalization
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Summary:In this paper, we derive a new effect of trade liberalization on the quality of the environment. We show that in the presence of heterogeneous firms, the aggregate volume of emissions is influenced by a reallocation effect resulting from an increase in the relative size of more productive firms. The relative importance of this reallocation effect and the scale effect well‐known from the literature is affected by the emission intensity at the firm level. Domestic emissions decrease as a result of a unilateral tariff reduction if and only if firm‐specific emission intensity decreases strongly with increasing firm productivity. As a result of the induced change in foreign emissions, domestic pollution can increase even if domestic emissions decrease.
ISSN:0965-7576
1467-9396
DOI:10.1111/roie.12092