تجارت و محیط زیست با یارانه از پیش موجود: تجزیه و تحلیل تعادل عمومی پویا

Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation, and other subsidies to domestic industries facing foreign competition. In a trade agreement, countries typically agree to reduce not only tariffs but also subsidies. We consider the effect of a free trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase output and pollution, reductions in some subsides required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. Reducing subsidies has three effects on pollution: (1) reducing subsidies to firms reduces pollution-causing capital accumulation, (2) if subsidized firms are more pollution intensive, then reducing subsides moves capital and labor from more to less pollution intensive firms, and (3) reducing subsidies concentrates production in more productive firms, increasing output and thus pollution. We derive straightforward conditions for which (1) and (2) outweigh (3). We then calibrate the model to China in 1997, and find that pollution has a more elastic response to reducing subsidies than to reducing tariffs. While a 5% reduction in tariffs increases all pollutants by approximately 1%, a 5% reduction in subsidies reduces pollution by 1.8–11.6%, depending on the pollutant. The reductions in pollution occur without any environmental side agreements or abatement policy changes.

Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation, and other subsidies to domestic industries facing foreign competition. The political process is unlikely to produce a uniform tariff. Instead, countries with high trade barriers employ a complex mixture of all these instruments, resulting in significant distortions. In a trade agreement, countries typically agree to reduce not only tariffs but also subsidies. For example, subsidies to exporting industries violate WTO rules.1 The main claim of our paper is that reductions in domestic subsidies implied by some trade agreements have significant effects on pollution emissions. These effects are associated with a country's opening to trade and, therefore, cannot be ignored when considering the effects of trade agreements on pollution. The focus of trade agreements and of this paper is not on benign and well-studied subsidies designed to correct an externality, but instead on subsidies designed solely to support a particular industry or firm (typically facing foreign competition). Such subsidies are sometimes called “perverse subsidies” (for example [26]). We show that reducing such subsidies has three effects on pollution. First, a reduction in subsidies to firms reduces pollution-causing capital accumulation. Second, if subsidized firms, industries, and/or state owned enterprises (SOEs) are more pollution intensive, then reducing subsides moves capital and labor from more to less pollution intensive firms. Third, reducing subsidies concentrates capital and labor in more productive firms, increasing output and thus pollution. We derive conditions under which the first two effects outweigh the third. In our calibration, the condition is satisfied for all three pollutants studied. Thus even if world tariff reductions cause pollution-intensive production to increase in a country, overall pollution may still fall because the tariff effect is more than offset by the reduction in pollution caused by the reduction in subsidies. Indeed, we calibrate the model to China in 1997 and find that pollution has a more elastic response to reducing subsidies than to reducing tariffs. While a 5% reduction in tariffs increases all pollutants by approximately 1%, a 5% reduction in subsidies reduces pollution by 1.8–11.6%, depending on the pollutant. The reductions in pollution occur without any environmental side agreements or abatement policy changes. There is a large theoretical literature on trade and the environment.2 Research has focused on three possible channels whereby a reduction in trade barriers can affect environmental quality. Following Copeland and Taylor [8] and others, we denote the idea that a reduction in trade barriers causes pollution intensive production to shift from countries with relatively stringent regulation to countries with relatively weak regulation the pollution haven hypothesis (PHH). The PHH predicts that, following a reduction in trade barriers, pollution rises in the country with weak regulation and falls in the country with stringent regulation. A second channel, the factor endowment hypothesis says that since pollution is capital intensive, reducing trade barriers should cause pollution intensive industries to move to the more capital intensive country, usually the more developed country. In the third channel, increases in income caused by a reduction in trade barriers affects both pollution intensive production and abatement spending. Mani and Wheeler [24], Low and Yeats [22], Ratnayake [28], and others find some evidence in favor of the PHH. These studies lack pollution data in less developed countries, and so must instead classify industries according to their pollution intensity in the US and then correlate output in pollution intensive industries to openness. On the other hand, Birdsall and Wheeler [6] and Lucas et al. [23] find that pollution intensity is relatively lower in more open economies. In general, environmental regulations do not seem to be a major factor in plant location decisions. As Antweiler et al. [2] note, both theoretical and empirical studies generally take pollution regulations and/or income to be exogenous. For example, countries may tighten environmental regulations after an inflow of pollution intensive capital. Even if pollution regulations are identical across countries, production moves to its most efficient location, causing production and pollution to increase. The resulting increase in income may itself cause countries to increase abatement or otherwise tighten pollution regulations, as has been noted in the Environmental Kuznets Curve (EKC) literature [13]. Antweiler et al. [2] study the effect of reducing trade barriers on SO2 concentrations. They decompose the effect into scale, composition, and technique effects. Reducing trade barriers causes output to rise, which increases pollution (the scale effect). However, the increase in income also results in increased abatement spending, reducing pollution (the technique effect). Finally, a reduction in trade frictions causes the country exporting the dirty good to specialize in that good, increasing pollution (the composition effect). They also avoid the data problems present in previous studies by using data on SO2 pollution emissions from the Global Environmental Monitoring database. They find a particularly strong technique effect, implying that trade improves the quality of the environment by raising income and abatement. This channel has perhaps the best support in the data. However, the EKC does not seem to be robust to changes in empirical specification or across pollutants [16] and [31], so the result may not generalize to pollutants other than SO2. We propose here an entirely new channel by which free trade agreements may affect the environment: the free trade agreement acts as a catalyst by which governments reduce subsidies. The subsidies are typically in industries facing foreign competition. The reduction in subsidies affects the share of production by subsidized firms, total production, terms of trade, and capital accumulation, each of which has an effect on pollution. The related literature on how perverse subsidies to industry affect the environment is less developed.3 Since almost all countries have industrial policies which favor some industries, what effect subsidies have on the environment is an important question. Bajona and Chu [4] provide a computational model where private and state owned firms coexist. We use this idea to develop a general theory of subsidies and pollution. The industry structure consists of non-subsidized (hereafter private) and subsidized firms, facing domestic and foreign competition. To receive subsidies, subsidized firms must agree to employ more labor than is efficient, which we model as a minimum labor requirement.4 In exchange, subsidized firms receive direct (cash) subsidies to cover the negative profits that result from the use of an inefficient mix of capital and labor.5 Subsidized firms also receive low interest loans from the government or state owned banks, modeled as an interest rate subsidy.6 Finally, subsidized firms have lower total factor productivity (TFP) relative to private sector firms. We prove the existence of an equilibrium in which subsidized firms and private firms coexist with the share of production of subsidized firms determined endogenously by the subsidies, labor requirements, and technology differences. Subsidies thus affect pollution by changing the share of production of the subsidized sector. Our firm structure is somewhat related to that of Fisher-Vanden and Ho [12]. They have interest subsidies but do not separately model subsidized and non-subsidized firms. Instead, an exogenous percentage of capital in each industry is subsidized. In contrast, in our model the share of capital which is subsidized is endogenous, and both subsidized and non-subsidized firms coexist. Thus, in their model a reduction in subsidies to a particular industry causes capital to flow to other industries, reducing pollution if other industries are less pollution intensive via a composition effect. In contrast, in our model a reduction in subsidies causes capital to move endogenously from subsidized to private firms even within an industry, reducing pollution if subsidized firms are more pollution intensive via a technique effect. In our model, reducing subsidies affects pollution through two main mechanisms. The first mechanism, which we call capital and labor resource reallocation effects, is static in nature and is the result of the reallocation of capital and labor from subsidized to private firms that reducing subsidies induces. First, reducing direct subsidies decreases equilibrium employment in subsidized firms, causing output to become more concentrated in private firms. Second, this decrease in employment causes capital to flow to the private sector, further concentrating output in private firms. If subsidized firms are more pollution intensive, these two effects cause pollution to decrease. However, as resources concentrate in the higher productivity private sector, overall output and therefore pollution rises. We derive sufficient conditions on parameter values for which the first two effects are stronger than the third. The second mechanism, which we call the capital accumulation effect, is dynamic in nature and affects intertemporal decisions. On one hand, reducing subsidies to firms directly reduces overall demand for capital. On the other hand, the rise in overall productivity caused by the concentration of capital in the private sector tends to increase demand for capital. We show conditions for which the former effect is stronger so the return to capital falls with subsidies, causing the capital accumulation to slow or fall, which implies pollution grows more slowly or falls over time as well. We calibrate the model to China in 1997, and simulate the effect on pollution emissions of reducing direct subsidies, interest subsidies, and tariffs. An important set of parameters are the relative emissions intensities between subsidized SOEs and private firms, which we assume are not subsidized. We estimate the emissions intensities using a panel of Chinese industry level data from 1995 to 2007, and find SOEs have significantly higher emissions intensity than private firms for three of four pollutants tested, controlling for industry- and time-specific effects. We simulate the effect of reducing direct subsidies targeted for elimination by the US-China bilateral WTO trade agreement, and find a surprisingly strong technique effect. Antweiler et al. [2] also find a strong technique effect using different data, which they attribute to an income effect on abatement policy. Our technique effect comes from a different source: reductions in subsidies required by a trade agreement concentrate production in more productive but less pollution intensive firms. This reduces pollution emissions intensity, while increasing income. Our technique effect is therefore an alternative explanation for the large technique effect found in the trade and environment literature. An empirical literature exists which estimates the effect of ownership on emissions or emissions intensity, using different data sets. As in our paper, most of these studies find that SOEs are more pollution intensive than private firms. Wang and Wheeler [38] find that provinces in China with larger state owned sectors have higher emissions intensity. Wang and Jin [37] find state owned plants in China are more emissions intensive than non-state owned plants. However, Wang and Wheeler [39] find no significant difference in emissions intensity between state owned and non-state owned plants (although 93% of their sample is state owned). Pargal and Wheeler [27] study biological oxygen demand in Indonesia and find that firms with a higher share of state owned equity are more pollution intensive. Hettige et al. [17] survey studies with similar results.7 Talukdar and Meisner [33] consider CO2 emissions for a panel of countries and find that countries with a higher share of GDP produced by the public sector have higher emissions. In addition several studies find that SOEs in some countries are held to lower standards for environmental compliance. Gupta and Saksena [15] find that SOEs in India are monitored for environmental compliance less often than private firms. Dasgupta et al. [10] find that SOEs in China enjoy more bargaining power over environmental compliance than private firms. However, Earnhart and Lizal [11] find an inverse relationship between pollution intensity and percentage of state ownership among recently partially privatized firms in the Czech Republic in their preferred model. The latter study focuses on a change in ownership, which does not necessarily imply a change in subsidies.8 In the next section, we develop a theory of pollution, subsidies, and trade, and in Section 3 we derive intuitive theoretical conditions for which pollution falls following a decrease in subsidies. Section 4 develops a computational version of the model. Section 5 gives the computational results, Section 6 considers various robustness checks, and Section 7 concludes.

In this paper, we analyze the effects of perverse subsidies and trade policy on the environment. We give theoretical conditions for which a reduction in subsidies to industry results in a decrease in pollution. The conditions require the subsidized sector to be sufficiently more pollution intensive than the private sector. We argue SOEs or other firms receiving various government subsidies are likely to also receive another kind of subsidy: lax enforcement of pollution regulations. Indeed, for the case of China, after controlling for industry fixed effects, SOEs are significantly more pollution intensive than private firms for three of four pollutants studied. Furthermore, our computational section shows that reducing direct subsidies to Chinese SOEs reduces pollution for SO2, soot, and dust. Reducing subsidies has a more elastic response than reducing tariffs. Direct and interest subsidies are larger to begin with, and interest subsidies directly affect capital accumulation, resulting in both the scale and technique effects lowering pollution. Several caveats are in order. First, given that China's state owned sector comprises about 46% of industry value added, China represents an extreme case. Still, given the evidence of weak enforcement of environmental regulations on SOEs in countries like India and Indonesia, and the prevalence of SOEs in developing countries, our analysis is very relevant for studying the environmental effects of trade agreements in developing countries. Further, given that nearly all countries give some subsidies to industry, our model has some relevance for developed economies as well. Second, subsidized firms in our model are price takers. Subsidized firms may have monopoly powers and SOEs may suffer from agency issues. Each of these firm structures may affect pollution. For example, granting monopoly powers may cause SOEs to reduce output and therefore pollution. If so, reducing subsidies may cause a larger scale effect than our model indicates. Nonetheless, for the case of China, SOE shares of value added are reasonable,24 which supports the idea that SOEs and private firms compete in the same industries at least for China. We are ignoring some other policies which cause deviations from the competitive equilibrium, such as other subsidies and price controls.25 In Appendix B.3, we use emissions per unit of value added as emissions intensity and SOE value added divided by aggregate value added rather than the ideal emissions per unit of production and SOE production divided by aggregate production. If SOEs are subject to price controls, a one to one mapping between value added and production no longer exists. We assume subsidies are reduced by an equal percentage across sectors. If subsidies are reduced unevenly, stronger composition effects may result. Finally, we use the Armington aggregator specification to capture intra-industry trade. It is well known that AGE models using this specification underestimate the magnitude of the increase in trade following a reduction in tariffs, even though they predict quite well which sectors will be most affected. The exogenous subsidies considered here are the outcome of the political process. Modeling this process is a subject of future research. Regardless of the political process, a free trade agreement, by creating new winners and losers, has the possibility of altering the political equilibrium. A trade agreement may potentially reduce pollution-causing subsidies in a way that a privatization may not. If the political equilibrium is unchanged, privatization is unlikely to produce significant changes. In this paper we have found a new channel through which economic policy affects pollution, a technique effect that results when production moves from a more pollution intensive subsidized firm to a less pollution intensive private firm. This technique effect could be examined in many other contexts. For example, countries with low subsides are both richer and have a cleaner environment, thus our model would likely reproduce the environmental Kuznets curve. Our model could also be used to examine the effects of privatization on pollution. These are subjects of future research.