Working Paper No. 08-06

Pollution from Consumption and the Trade and Environment Debate

Scott Holladay

October 2008

ABSTRACT

Pollution generated by consumption has largely been ignored in the trade and environment debate, despite the fact that it accounts for a large portion of total emissions. This paper develops a Heckscher- Ohlin model of international trade and pollution emissions and ana- lyzes the impact of trade liberalization on pollution generated by pro- duction and consumption. The results indicate that pollution from consumption can increase when pollution from production decreases after a trade liberalization (and vice versa). This is due to a large change in the mix of industries (the composition eect), which dom- inates changes in the size of the economy and production technology (the so-called scale and technique eects respectively). Trade liberal- ization leads to a convergence in pollution levels from consumption and a divergence in pollution emissions from production. The more similar the countries liberalizing bilateral trade, the smaller the composition eect and the more scope there is for environmental regulations to reduce total emissions.

DOWNLOAD PAPER