The effect of environmental taxes on the volume of international trade

This paper is a response to Ropke's (1994) question whether environmental t axes increase or decrease the volume of international trade. Using a three- country Heckscher-Ohlin-Samuelson model, it is shown that the effect can be in either direction. In the absence of pollution haven and three-country e ffects that reverse natural comparative advantage, environmental taxes decr ease (increase) the volume of trade between any two countries when the tax is larger in the country that exports (imports) the pollutive good. The env ironmental tax can also generate strong trade effects between two of the co untries, changing production costs and thereby reversing the expected tax e ffect on a third country. The effects on trade are likely to be smaller whe n comparable pollution damage is global rather than local. (C) 2000 Elsevie r Science B.V. All rights reserved.