Emissions, exporters and heterogeneity: asymmetric trade policy and firms selection

This paper examines the impact of trade policy on total emissions of greenhouse gases in an emission-augmented Melitz model that accounts for heterogeneous firms and international asymmetries. Trade improves efficiency through selection and share-shifting effects on firms, and thus – if more productive firms match with cleaner technologies – symmetric trade openness can improve overall environmental quality. Yet emission technologies, economic characteristics and trade barriers are highly asymmetric across countries. This can lead to some unexpected implications of national trade policies on total carbon emissions. We find that, even in an asymmetric setting, trade openness can help reducing global emissions. However different effects act together depending on the size, productivity and emission profile of the trading partners. We then resort to a simple parameterization of the model to show the effect of different forces. Our results suggest that trade liberalization can unambiguously lower emissions if coupled with transfers of green technology.