Global Carbon Taxation: Analyzing Pollution Effects When Mobile Firms Trade

ABSTRACT This paper examines the implications of a global carbon tax within a framework that includes asymmetrically sized countries, imperfectly competitive markets, and mobile, heterogeneous firms engaged in international trade. In the short run, the tax primarily produces Pigouvian effects—raising prices, reducing production, and lowering emissions, which aligns with established literature. In the long run, the mobility of firms introduces additional effects, influenced by trade intensity. Specifically, the tax acts as a dispersion force, encouraging firms to relocate to smaller markets to minimize tax burdens, thus revealing its spatial non‐neutrality across varying market sizes. High trade costs exacerbate this effect, potentially eliminating the most environmentally favorable locations. From a welfare perspective, the tension between consumer surplus and emissions can be mitigated if consumers are environmentally conscious and green policies are complemented by trade policies.