On the North-South Effects of Environmental Policy: Rent Transfers, Relocation and Growth

Abstract

We construct a North-South Romer model of endogenous growth in which the South is endowed with the entire stock of an essential polluting non-renewable resource and in which world economic growth is driven by a northern research sector. We consider the stock of pollution as representing the greenhouse e ect, thus in uencing global welfare. We rst solve the optimum allocation. Then, we characterize the optimal policy in equilibrium. Next, we examine the e ects of the time-pro le and the levels of environmental taxes. The time-pro le of the tax determines when the resource is extracted and thus the growth rate of world output. The tax levels determine the magnitude of world production, the location of this production and both northern and southern consumption levels. We show that the tax levels a ect the e ciency of the global economy through relocation, while also affecting the split of total production between North and South through both relocation and rent extraction. Finally, we completely assess the e ects of an increase in the northern environmental tax level depending on both northern and southern initial environmental tax levels. In particular, we study the northern tax's impacts in the region of the scal competition equilibrium. JEL classi cation: F42; H23; O4; Q34; Q5