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 analyzes the impact of trade liberalization on pollution generated by production 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 effect), which dominates changes in the size of the economy and production technology (the so-called scale and technique effects respectively). Trade liberalization 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 e ect and the more scope there is for environmental regulations to reduce total emissions.

JEL classification: F18, Q5
Keywords: trade and environment, north-south models, trade liberalization impacts

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