As much of the world debates how to reverse climate change during a sweltering summer, two faculty members at Kalamazoo College examine whether national attempts at combined trade and environmental policies could provide a key strategy.
Analysis by Patrik Hultberg, K’s Edward and Virginia Van Dalson Professor of Economics; and Darshana Udayanganie, Assistant Professor of Economics K, will soon be published in the Journal of Environmental Economics and Policy. Among their conclusions, he will note that Europe and the United States plan to adopt border adjustment taxes by 2026, aimed at influencing the carbon emissions of foreign countries.
Hultberg and Udayanganie suggest that such taxes could be options because global agreements on environmental policy, such as the Paris Agreementthe Kyoto Protocol and the Montreal Protocol– seem to have shortcomings.
“The best thing would be for countries to work together and make these international agreements,” Hultberg said. “But countries have an interest in violating these agreements. You would think that if other countries change their behavior, maybe I don’t have to change mine. In addition, authority over environmental policy does not extend to foreign countries.
Accordingly, Udayanganie said that an alternative to environmental policies would be to calculate the amount of carbon content created by the production of a good to add a tax, imposed on the producing nation, which thus increases the world price of the product, encouraging actions beneficial to the environment. This is the idea behind Europe and the United States exploring border adjustment taxes.
“When we just use tougher environmental policies, some of these companies might just go to another country,” she said. “This means that the pollution created is not going to be reduced; it will simply be produced elsewhere. Such border adjustment taxes could encourage nations to adjust their environmental policies to avoid environmental taxes from us.
However, one of the consequences of such a plan could be that the richer countries take advantage of the developing countries by placing the most political difficulties on the developing countries.
“Europe and the United States are trying to tell a story that we’re trying to do this, not because it’s good for us, but because we want to save the global climate, while telling other countries: “You have to change your behavior to help us do that,” Hultberg said. “A developing country might look at this border tax adjustment and say, ‘You’re doing something to make us worse while benefiting your own consumers. and producers.’ It is true that by changing the international price, we enrich ourselves at the expense of producers who could be in developing countries.
Therefore, a strategy that combines environmental and economic action could be the best option for tackling climate change. Such a combination, Udayanganie said, could compel companies to clean up the environment in one country or stop relocating and produce where they are. The thought leadership behind these ideas could go a long way towards ending concepts like carbon leakage, which is the relocation of emissions from regulating countries to countries with weaker or no environmental regulations.
The model as a teaching tool
Hultberg and Udayanganie’s work may prove beneficial to students completing higher-level integrated projects at K and in environmental economics and international business courses at the College, not to mention other institutions. “One of the comments we received from reviewers mentioned that he could use models like these to teach students how to combine these policies and implement their own,” Udayanganie said. “That way we could convince environmental policy agencies, or the people who work for them, to educate themselves on how to use these policies.”
“The problem we have with most economics publications is that the models used are so abstract and so mathematically difficult that we can’t really use them at the undergraduate level, either in economics or in mathematics,” added Hultberg. “One of the goals we had with this article was to use the model we teach in intermediate microeconomics, for example, a foundation course for our majors. That’s why Darshana and I can use these ideas in our courses .
The publication date of their article has not yet been determined. Still, this wasn’t the first project that Hultberg and Udayanganie have joined forces on, and don’t expect it to be the last.
“It motivates me to work with Patrik,” said Udayanganie. “We both love microeconomics and mathematical models, so it helped us work together.”
“It’s more fun to work together,” Hultberg added. “The other people I work with are all over the world and we often work on things like education policy, and when COVID came it took me away from what I really want to work on, which is trade international. It was a real opportunity for me to do the economy that I like to do.