Environmental and Energy Issues in an Open Economy

Oh, Kyungsoo

Graduate Thesis Or Dissertation

Environmental and Energy Issues in an Open Economy Public Deposited

Analytics

Citations

Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/zp38wc62h

Abstract

The environmental and energy consequences of globalization have become an important topic of debate. My dissertation examines the interaction between environmental and energy issues and international trade. Specifically, I investigate environmental regulations and policy in an open economy. In the first chapter, I analyze how an environmental tax on pollution from consumption affects trade flows and welfare in an open economy. In particular, I argue that the effect of an environmental tax on the direction of trade flows depends on who is directly burdened by the regulation (consumers or producers) regardless of who is the polluter. In the case of pollution generated by consumers, a tax on consumers who are the polluters tends to increase exports and reduce imports of dirty goods. This result is the opposite of the well-known effect arising from taxes on pollution-intensive industries. Stringent environmental regulations on pollution-intensive industries diminishes exports and increases imports of dirty industries. In terms of welfare, I show the importance of targeting the policy instrument to the correct source of pollution. Assuming pollution is caused by the consumption of a good, a production tax has a weak effect on increasing welfare through reducing pollution. Furthermore, welfare can fall if the production tax ratio is too high, leading to reduced national income. The second chapter is motivated by recent trends in the U.S. economy: increasing imports from China, decreasing energy consumption, and increasing output. There are two primary theoretical approaches related to the relationship between energy use in U.S. manufacturing and increasing imports from China: Heckscher-Ohlin (H-O) trade theory and the Pollution Haven Hypothesis (PHH). These two frameworks generate opposite predictions about the relationship between these trends. H-O theory suggests that with increased Chinese import penetration, U.S. manufacturing should move toward more energy-intensive industries and as a result, energy use in U.S. industries should increase. Alternatively, PHH predicts that energy-intensive industries in U.S. manufacturing would relocate to other countries with more lax energy regulations. As a result, this would lead U.S. manufacturer to use less energy. To understand the determinants of energy use in U.S. manufacturing, I construct a computable general equilibrium (CGE) model of the U.S. economy using the 2005 input-output table. I find that increasing imports from China causes all manufacturing industries to use more energy. Energy use increases proportional to the output of each industry. However, the magnitude of this effect is very small. In order to help understand the magnitude of the effect, I introduce a (counter-factual) tax on energy use in U.S. manufacturing. Combining these two scenarios, increasing imports from China and an energy tax, produces an outcome consistent with the actual data: decreasing energy consumption and increasing output. Interestingly, total energy use in the U.S. manufacturing sector can decrease while at the same time U.S. welfare can increase due to its improved terms of trade. This result shows that a small energy tax can offset the increased energy use caused by Chinese import penetration, but will not reduce welfare. In addition, unlike the prediction generated by H-O theory, increasing Chinese imports causes imported intermediate inputs from China to become cheaper resulting in increased output in all sectors of U.S. manufacturing. In the final chapter, I numerically estimate these effects using U.S. manufacturing industry-level panel data from 1997 to 2005. I decompose the effect of increasing imports from China on energy use in U.S. manufacturing into a factor substitution effect and an output scale effect. Because import penetration may be endogenous, I instrument for Chinese import penetration using Chinese share of world trade. My results indicate that increasing imports from China raises consumption of fuel and electricity. As in the simulation model, the marginal effect of Chinese import penetration is small, about 0.05% to 0.08%, but statistically significant. Interestingly, the directions of the factor substitution effects on fuel and electricity are opposite. Increasing imports from China causes a decrease in the factor ratio of fuel over labor, but an increase in the ratio of electricity over labor.

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