UC Davis

Recently, a border carbon adjustment (BCA), which is a type of the tariff, has received attention,as the European Commission plans to impose them on countries that do not make efforts to decrease their greenhouse gas emissions. Since governments cannot regulate foreign countries’ carbon emissions directly, border carbon adjustment can act as an alternative policy. In this dissertation, I explore the possible effects of the BCA based on a trade model, check the effects of a unilaterally stricter environmental policy, and lastly examine a trade policy that considers local pollution.

In the first chapter, I explore the effect of a carbon tax and BCA on exports, technologyadoption, welfare, and emissions under the asymmetric heterogeneous trade model of Melitz (2003). Specifically, to solve the asymmetry in the variable costs due to the environmental policy, I use the graphical analysis method in Unel (2013), following a similar setup to that of Cui (2017). As well as calibrating the model, I achieve several results with welfare and policy implications. First, the model suggests that firms in both the home and foreign country tend to adopt high technology because of the home country’s stricter environmental policy, and the imposition of BCA stimulates this technological upgrade further for the home country. Second, as a result of a higher emission tax, the home country is worse off from consumption, whereas the foreign country can enjoy higher welfare from its consumption. The imposition of BCA can alleviate this by leveling the playing field. Third, the home country’s unilateral higher emission tax turns out to reduce the home country’s emissions, mostly from the ‘mass effect’ and the ‘price effect.’ Part of this reduction is offset, however, by ‘carbon leakage’ from an increase in foreign exports. The BCA effectively counters this ‘leakage problem,’ but it relocates the emissions back to the home country, and thus the total emissions increase slightly. While it is hard to rationalize BCA from an environmental perspective, the home country can still have enough incentive to impose a BCA, since it can help to restore the home country’s competitiveness, which is linked to the recovery of the utility from consumption.

In the second chapter, I test the effect of a unilaterally stricter environmental policy. Koreaaccounted for about 1.6% of the world’s GHG emissions between 2000 and 2019 and ranked seventh (600 MtCO2) in terms of CO2 emissions in 2017. Considering the high level of industrial emissions and the increased concerns about climate change, Korea has adopted both a target management system (TMS) and an emission trading system (ETS) to reduce GHG emissions. Compared to TMS, which is regarded as a preparatory stage, an ETS system is regarded as more genuine in Korea, so I test the effect of the ETS on both GHG emissions and economic performance. Using firm-level data, I find that both GHG emissions and revenue decreased for business-reporting firms after the introduction of an ETS, but they did not decrease for facility-reporting firms. This is related to the firm size: as more facility-reporting firms are small, they relied more on the purchase of allowances rather than investing in measures to reduce emissions. In terms of exports, I could not find a significant decrease attributable to ETS regulation or evidence of the ‘pollution haven hypothesis.’

In the third chapter, I explore tariff decisions based on the political economy model whena country considers local pollution. I extend Grossman and Helpman’s (1994, 1995) ‘Protection for Sale’ model to incorporate the externalities in consumption and product regulation. As I add externalities and regulations, optimal tariffs become higher than in the original model, and domestic regulations are determined by the political economy considerations.