THE WELFARE EFFECTS OF REVERSED BORDER TAX ADJUSTMENTS AS A REMEDY UNDER UNILATERAL ENVIRONMENTAL TAXATION

Border Tax Adjustments (BTAs) resurfaced recently in national policy debates as a possible measure to counter the anti-competitiveness effect of unilateral environmental taxes. There seems to be no consensus in the literature on the effectiveness of BTAs under environmental taxes. This paper aims to provide a theoretical Heckscher-Ohlin analysis that not only challenges the effectiveness of BTAs, but also proposes an alternative approach to counter the anticompetitiveness effect of unilateral environmental taxes. Using conventional Heckscher-Ohlin methodology, in a small country, we show that policy makers should, instead of implementing BTAs, consider the opposite of BTAs to mitigate the anti-competitiveness effects of environmental taxes. We show that gains from trade, due to a reduction in import tariffs, could, under certain assumptions, offset the initial tax induced welfare loss.