Environmental Externalities and Optimal Commodity Taxation Under ECSR: Revisiting the Origin‐Destination Principle Trade‐Off

ABSTRACT This paper explores the choice of origin versus destination tax principles in an open economy with strategic environmental corporate social responsibility (ECSR). Conceptualizing ECSR as collective reputation, we analyze how pollution scope and consumer awareness shape the optimal regime. Under localized pollution, the origin principle generally dominates due to rent‐shifting efficiency, although a non‐monotonic sandwich result emerges at intermediate trade costs. Under global pollution, we challenge the conventional view that the destination principle is universally superior for preventing a race to the bottom. We identify a novel reputation rescue mechanism: in the high‐ECSR regime, the origin principle reclaims superiority because its production subsidies are essential to sustain collective reputation and preserve market viability. These findings offer a rationale for the policy divergence between the EU's CBAM and the US IRA.