The Impact of Energy Tax on Economic Structures and Trade of China, Japan, Korea, and the U.S.

Hio-Jung Shin

Professor, Dept. of Ag. & Resource Economics, Kangwon National University, Korea(Republic)

E-mail address: hiojung@kangwon.ac.kr

Heon-Goo Kim

Visiting Researcher, Agriculture and Life Sciences Research Institute, Kangwon National University, Korea(Republic)

E-mail address: hgkim9@empas.com

ABSTRACT

This paper seeks to determine the susceptibilities of the economies of China, Japan, Korea, and the U.S. to a stringent environmental regulation. When a country unilaterally initiates a stringent energy tax, even when it is a less affected country like the U.S., we find that there is a reduction in production activities in the economy and a loss of international price competitiveness. The implications of this work seem to be reflected in the climate conferences by the desire of each major pollution-emitting country to commit only to its reduction target under the condition that the agreement of targets includes the participation of all major pollution-emitting countries. Concluded might be that a sole initiator loses and most of the bystanders who do not participate can benefit even if with an exceptional case like Korea.

KEYWORDS

Energy tax, Industrial Structure, Intermediate input trade, Multiregional I-O analysis

JEL classification: F14, F47, H23

This study is supported by Kangwon National University, Korea(Republic) and TERRECO program of University of Bayreuth, Germany. corresponding author

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1. INTRODUCTIONThe Climate Conferences in Rio, Kyoto, Montreal, and Copenhagen have focused on establishing a

goal of reducing global greenhouse gases. The goal of these agreements is to reduce the consumption of

fossil fuels that is causing the greenhouse effect. The obligation of participating member countries is to

produce international agreements involving greenhouse gas emission targets. Reducing CO2 emissions is

one of the issues because this gas composes a large portion of many types of greenhouse gas emissions1 around the world. Among the many pollution abatement schemes, the imposition of a carbon energy tax

on fossil fuel use is regarded as the most convenient and efficient way of controlling greenhouse gas

emissions. Wissema and Dellink (2007) show that a carbon energy tax as a specific energy tax leads to

greater emission reductions than an equivalent uniform energy tax. As an indirect tax, an energy tax

(Carraro and Galleotti, 1997) should be levied for the quantity of CO2 produced during fossil fuel use. It is

believed, however, that this tax system would yield a substitution effect because it creates a disincentive

to use energy sources that produce CO2.

Despite the need to introduce a carbon energy tax system as a pollution abatement scheme, this system

has not yet been adopted in most countries.2 As a means of stringent environmental regulation, the word

“tax” is usually thought to increase commodity prices through production cost increases borne by the

producers. Even if the carbon energy tax is an excise tax that burdens the final users of the fossil fuel

through wholesalers and retailers instead of the producers, it also yields price increases. The delay in

utilizing this system is due to the fear of it decreasing production and impairing the competitiveness of

those countries that implement it.

1.1. ProductionPeterson et al. (2011) find that major none-Annex I countries with emission targets proposed in

Copenhagen have a relatively larger reduction in GDP compared with Annex I countries. 3 However,

unlike the subject area of decreased production, there are numerous studies about the inabilities of

1 Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbon (HFCs), sulfur fluoridation (SF6), and perfluorocarbon (PFCs) are categorized as greenhouse gases.2 This system is implemented in European countries such as Denmark, Sweden, Norway, the Netherlands, Italy, and Finland.3 Non-Annex I countries: Brazil, China, Mexico, South Africa, South Korea. Annex I countries: Australia, Canada, EU 27, Japan, Norway, Russia, Switzerland, Ukraine, U.S.

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stringent environmental regulations. Most papers deal with how the economy’s production is affected by

pollution abatement schemes and show the empirical relationship between the regulation and the

production over a certain period of time. Lanoie et al. (2008) show that the impact of the regulation on

productivity is negative at the lagged 1-year regulation variable but becomes significant and strongly

positive after lagged 2- and 3- year variables.

In a firm level study, Galdeano-Gomez et al. (2008) demonstrate the positive relationship between firm

investment in environmental practices and productivity improvement, and they show the environmental

spillover effects. In a manufacturing sector study by country level, Aiken et al. (2009) show that capital

expenditures on pollution abatement are not associated with a substantial decline in productivity in

Germany, Japan, the Netherlands, and the U.S.

Jaffe et al. (1995) demonstrate that studies of productivity effects have found environmental regulation

to have a modest adverse impact on the U.S. manufacturing sector. They conclude that pollution

abatement schemes cannot be considered the primary cause of the productivity slowdown even if there is

substantial variation in some industrial sectors. Later, they propose that environmental policy gives rise to

the reduction of environmental externalities through technological change (Jaffe et al., 2002). These

papers show that the production decrease due to the production cost increase caused by environmental

regulations can be overcome by later productivity enhancement.

1.2. CompetitivenessJaffe et al. (1995) demonstrate that the more stringent environmental regulations do not have large

adverse effects on competitiveness. They assert that factor endowments, rather than stringent regulations,

are more important in determining competitiveness. According to Xu (1999), higher environmental

standards barely affect the international competitiveness of environmentally sensitive goods (ESGs). Xu

also shows that in most developed countries, the introduction of more stringent environmental regulations

does not lead to a change in trade patterns of ESGs (Xu, 2000). There are, however, ongoing debates

about whether increased environmental regulation would reduce competitiveness and thus lead to both

deindustrialization and international relocation of polluting industries (Neary, 2006).

Mongelli et al. (2006) analyze the situation in Italy using an input-output model to calculate energy

consumption intensities and greenhouse gas emissions. Italy adopted a carbon energy tax as an

environmental regulation in 1998 as a result of its participation in global warming agreements, but

Mongelli et al. show the tax cannot be considered sufficiently relevant to produce a loss in

competitiveness. Weber and Peters (2009) also use the input-output model to find the effect of a carbon

tariff adopted by the U.S. to protect its industrial competitiveness and induce other trading countries to

increase pollution abatement. They argue the carbon tariff would be less effective than global cooperation

through technology sharing and sectoral agreements.

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Levinson (2009) finds that due to import growth coming from industries that are not pollution

intensive, from 1987 to 2001, there was a green shift in U.S. imports toward clean industries. His

approach also uses the input-output model generally held by many economists, including Slade (1996).

The model is of a fixed-coefficient variety, which implies that input substitution does not occur in

response to changes in relative prices. Unlike the aforementioned economists, Robison (1988) uses an

input-output model that allows a response to changes in relative prices. He finds that the impact of the

U.S.’ environmental regulations are negative for most industries and potentially affect trade. He finds that

under pollution control programs, more higher-pollution-related goods are imported and more less-

pollution-related goods are exported through changed comparative advantage.

1.3. Study approachThis paper uses a multiregional input-output model to study the size of the production decrease in the

economies of China, Japan, Korea, and the U.S. that result from pollution abatement schemes,

specifically, an energy tax system on petroleum products. First, each country’s output elasticities with

respect to an increasing energy tax are found and compared to determine the countries’ vulnerabilities to

more stringent regulations. This procedure is utilized to find the degree of production decrease in each

country following the increase in pollution abatement cost.

Second, the changes in production activities and intermediate input trade as a result of the U.S.’

implementation of the stringent regulation will be examined with regard to change in competitiveness.

The output changes in China, Japan, and Korea due to the increase in the energy tax in the U.S. are

discussed, as are the changes in intermediate input trade patterns of the U.S. with these three export-

oriented countries in the northeast Asian region. Through the changes in intermediate input trade, we can

find the structural changes of production in the countries involved.

In this analysis, we assume that the primary inputs of labor and capital cannot move between countries.

Changes in exchange rate, transportation cost, and offsetting government policies such as retaliatory trade

tariffs, are also ignored.

2. THE MODELTo find the industrial output elasticities4 by country level, we use a Multiregional Variable Input-

Output (MRVIO) model. The MRVIO model with unitary elasticity of substitution used in this paper is

modeled after Liew & Liew (1991) and Liew et al. (1994). This model allows for changes in

4 We use output elasticities to compare countries easily because these countries have large differences in output and economy size in dollar value.

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technological coefficients that imply input substitution in the production process. As a result, it will give

us an assessment of the impact on the economy of the input cost increase of the pollution abatement

scheme.

In addition, when using this model, it is possible to analyze the prevalent impact not only in the

domestic industries, but also in industries in foreign countries. The analysis is conducted by determining

how the energy tax implementation in each country affects the industries of the corresponding country.

For our analysis, we use the Asian International Input-Output Table 2000 issued by the Institute of

Developing Economies (2007). The data in this table show the flow of commodities and services between

various industries both domestically and internationally. Using these data, we can find each country's

industrial dependence on the pollution abatement scheme of a specific country.The output equation for x i

s is expressed as

x is=∑

r=1

m

∑j=1

n

xijsr+∑

r=1

m

f isr−−−−−(a)

(industry: i= 1,…n, country: s=1,…m).5 ---- (1)Each commodity produced by each industry in country s (x i

s) is purchased by industries (x ijsr) and final

demand (f isr) of all countries.

x is: the amount of commodity i produced in country s by industry i

x ijsr: the amount of commodity i produced in country s that is purchased as an intermediate input by

industry j located in country r

f isr: the final demand of commodity i, produced in country s by households and governments of countries

s and r that are not used as an intermediate input in their production process.

All firms are assumed to maximize their profit by maximizing the gap between revenue and cost

subject to technical constraints of the log-linearized Cobb-Douglas production function frontier:

MAX ∏ ¿∑r∑

j( p j

r¿¿x j

r−∑i∑

spij

sr x ijsr−∑

kw kj

r Lkjr )¿¿

+∑r∑

jλ(¿ ln x j

r−α ojr −∑

s∑

iα ij

sr ln x ijsr−∑

kβkj

r ln Lkjr )¿

where ∑s∑

iαij

sr+∑k

βkjr =1 (a production function homogeneous of first degree).

5 From now on,

m

r

n

j1 1 will be denoted as rj for simplicity. 5

Regions and regional flows are described by superscripts; commodities and commodity flows are

described by subscripts:

p jr: unit price of x j

r

x jr: the amount of commodity produced by industry j located in country r

pijsr: unit price of x ij

sr

α ijsr: coefficient of intermediate input i produced in country s that is used by industry j located in country r

(x ijsr / x j

r)

w kjr : unit cost of value-added sector k (labor and capital service, indirect taxes) used or expended by

industry j in country r

βkjr : coefficient of value-added sector k used or expended by industry j in country r (Lkj

r /x jr)

Lkjr : service of value-added sector k used by industry j in country r

After deriving the first order condition by differentiating the Lagrangian function with respect to the

control variables, the optimal employment level of control variables can be obtained. The optimal profit

maximizing employment level of control variables such as intermediate input can be expressed as the

following:

x ijsr=

α ijsr p j

r x jr

pijsr =

αijsr p j

r x jr

pis

As we assume there is no trade cost such as transportation costs between countries, tariffs or exchange rate change, pij

sr=p is .

The optimal profit maximizing employment level of primary inputs or indirect taxes assumed to be non-

trans-boundary can be expressed as the following:

Lkjr =

βkjr p j

r x jr

w kjr

These two optimal levels of intermediate inputs (x ijsr) and value-added sectors (Lkj

r ) that are substituted in the production frontier will lead to the price equation for industries. The change of unit cost (w kj) in the

value-added sector affects the commodity price (p), which can be expressed as the following:

lnp=( I−A ' )−1 Σk βkj ln w kj−−−−−(b)where A is the matrix of technological coefficient of industries.

This price equation (b) is not based on the assumption of full-cost pass-through into prices as it was by

Robison (1988). Rather, the prices are affected by the Leontief Inverse involving the input intensity of production when a change in the unit cost (w kj) occurs due to an energy tax imposition.

The optimal level of intermediate input involves relative prices of commodities, and those prices affect

the output equation (a). The prices obtained from equation (b) as a result of the change in input cost are

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used for the industrial output prediction. The relative prices that have changed lead to the changes in

intermediate inputs purchased by other industries of all countries. As a result, the technological coefficients assumed to be fixed by Leontief will be changed from the A matrix to the p̂−1 A p̂ matrix.

The output equation will be the following:

x¿ (I− p̂−1 A p̂)−1 f = p̂−1(I−A)−1 p̂ fwhere p̂ is the diagonal matrix of prices and f is the column vector of final demand.

By multiplying the output equation, x= p̂−1(I−A)−1 p̂ f , on both sides by( I−A) p̂, we then derive

the following equation:

(I−A) p̂ x=(I−A) p̂ p̂−1(I−A)−1 p̂ fp̂ x−A p̂ x= p̂ f

The total differentiation of p̂ x−A p̂ x= p̂ f makes the equation ofdx the following:

dx= p̂−1¿

¿ p̂−1 ¿ ¿ p̂−1 ¿ ¿{ p̂−1 ¿

¿ { p̂−1¿¿To determine the output change with respect to cost variation for pollution abatement, the former term including (dln wkj) will be considered in equation (c). Because the latter term (df ) is the change in the

final demand, it is not dealt with in our analysis. This output change equation can be modified into an

elasticity equation by pre-multiplying an inverse of a diagonal matrix of output, ¿ ¿ ¿¿¿ d lnx ¿¿¿ dlnx /dlnw kj¿¿¿ - - - - - - - - -(d)

Equation (d) represents the elasticity of output change with respect to a change in an excise tax imposed

on a specific industry in a specific region.

For the analysis of intermediate input trade, the net export (export less import: X-M) is derived from

the multiregional table showing the intermediate input trade between regions.

X−M=∑s∑

i

α ijsr p j

r x jr

pis −∑

r∑

j

αijrs p j

s x js

p ir ------(e)

Each row i in region s shows the export of the intermediate input of the corresponding industry of the

region s to other ones in region r, in other words, the export to r by s. Each column j in region r shows the

import of the intermediate input of the corresponding industry of the region r to other ones in region s, or,

the import from r by s.

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This paper using equations (b) and (d) to examine the changes when there is a 1% excise tax (energy

tax) increase6 in the petroleum products industry in each of the four countries. We assume that the energy

tax is imposed on the producers of petroleum products at the shipment stage. The industrial change in the

domestic economy and subsequent changes in input trade between a specific country and the other three

countries are investigated using equation (e).

3. RESULTS3.1. Production change<Table 1> Industrial output elasticities resulting from the adoption of an energy tax increase by country

DX ELASCH ELAS18J DLNX

-4918.187 0.0000184 -0.003515 -0.000035

6 The 18 industries in the data that we are using come from aggregating various detailed industries. The various industries in the petroleum products industry are gasoline, diesel, liquefied petroleum gas, natural gas, kerosene, etc. These different fuels are taxed differently and are aggregated into the excise tax of the petroleum products industry. Thus, the 1% excise tax increase in the petroleum products industry means that under more stringent regulation, each fuel pays 1% more than before. It does not mean a uniform tax.

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<Table 1> shows the industrial output elasticities from increasing the energy tax in China, Japan, Korea

and the U.S. These elasticities indicate the resulting degree of change in the production activities of each

economy. The negative value of No. 7 Petroleum products industry is the own output elasticity with

respect to the increase in the energy tax. The other 17 elasticities are cross output elasticities with respect

to the price increase in petroleum products affected by the energy tax. The industries with a relatively

heavy dependence on petroleum products in their production process will have a negative value, which

implies a production decrease. On the other hand, a positive value means that the industries depend less

heavily on petroleum products and increase production.

The own elasticity from the energy tax system on the petroleum industry is the smallest (-0.005827) in

the U.S. and second smallest in China (-0.079913). The petroleum products’ upward price pressures that

result from the energy tax have a smaller effect on the petroleum industries of the U.S. and China than on

Korea (-0.146027) or Japan (-0.23855). The results show that environmental regulation causes substantial

hardships for mineral-poor countries such as Korea and Japan, whereas the U.S. and China, which are

wealthy countries with large petroleum endowments, are less susceptible to pollution abatement schemes

even though they are net importers of petroleum.

In cross elasticities, there are 6 industries negatively impacted in China, 11 in Japan, 15 in Korea, and 2

in the U.S. The economy of the U.S. appears to be the least affected by the tax increase because it has the

least number of affected industries. Aspects of the Chinese economy also appear to be less affected when

compared to Japan and Korea. Even if the economy of Japan has the largest own elasticity, 11 industries

are negatively affected, which means that the entire economy is affected less than Korea, which has 15

affected industries. We interpret this finding to mean that the Japanese industries’ production process is

more energy efficient than that of Korea.

The sum of cross elasticities obtained by adding all industries except own elasticity shows that the U.S.

is unique in that it has positive overall effects on other industries (0.0011574).7 The country whose energy

tax has the worst effect on other industries is Korea (-0.0432897). Japan is the second worse (-

0.0171984), followed by China (-0.0074053). This result does not imply that China has developed energy

efficient technology superior to that of Japan and Korea, but rather that China has relatively cheap energy

costs compared with the two other countries. Environmental regulations will certainly cause hardships for

countries that are poorly endowed with petroleum resources and must buy their resource requirements at

higher prices through additional tax burdens.8

7 This result is similar to Aiken et al. (2009), even though their study was confined to the manufacturing sector. The pollution abatement did not adversely affect the manufacturing sector of the U.S. relative to Germany, Japan, and the Netherlands (p.24). 8 From the table, we obtain the following facts: The Korean petroleum products industry already incurs a heavy tax burden of 22% in its production cost, whereas other industries have an average of 2%. The Japanese petroleum products industry is also already heavily burdened, with 35% of its production cost taxed, whereas other industries have an average tax burden of 3%. Compared with these countries, the Chinese petroleum industry has a smaller tax burden of

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Appendix A shows the output change derived from the above output elasticities for all countries. It

shows the country that initiates the environmental regulation faces an overall decrease in total output.

Environmental regulations have the smallest negative impact on production in the U.S. The impact is the

largest in Korea, followed by Japan and China. The regulations cause a 0.000029% decrease in

production in the U.S., a 0.0028% decrease in China, a 0.0034% decrease in Japan, and a 0.0068%

decrease in Korea.9

<Table 2> Air polluting industries’ share in the economy by countryCountry Original share (%) Changed share (%) DifferenceChina 20.79702909 20.79484995 -0.002179134Japan 12.04698014 12.04387829 -0.003101853Korea 18.67670878 18.67127471 -0.005434067U.S. 9.976657107 9.976583523 -7.35835E-05

* The last column “Difference” is the value of subtracting the Changed share from the Original share.

<Table 2> is derived using the output level for each industry given in Appendix A. This table shows the

air polluting industries’ output share in each country. The air polluting industries are categorized

according to Mani and Wheeler (1998).10 We selected seven industries for this paper: No. 4. Timber and

wooden products; No. 5. Pulp, paper, and printing; No. 6. Chemical products; No. 7. Petroleum products;

No. 8. Rubber products; No. 9. Non-metallic mineral products; and No. 10. Metal products.

The country with the highest ratio of the output of these seven industries to the total output of the

country’s economy is China, with 20.79702909% in the Original share column. Korea is next with

18.67670878%, followed by Japan with 12.04698014%. The U.S. has the least Original share at

9.976657107%. The third column, Changed share, implies that the industrial share changed as a result of

each country’s assumed implementation of the energy tax increase.

After the assumed increase of the energy tax, the degree of shrinkage in air polluting industries is the

highest in Korea where there is a difference of -0.005434067. Next is Japan with -0.003101853, followed

by China with -0.002179134. Finally, the U.S. shows the smallest degree of shrinkage of the industrial

8%, whereas other industries have an average tax burden of 5%.9 0.000029% (= $5,166 thousand / $17,944,648,000 thousand) for the US: 0.0068% (= $81,918 thousand/ $1,200,093,098 thousand) for Korea: 0.0034% (=$294,501 thousand/$8,682,266,757thousand) for Japan: 0.0028% (=$87,493thousand/$3,111,142,045thousand) for China. The results for Japan and China differ from Peterson et al. (2011) where the U.S. and Japan (Annex I countries) have a relatively smaller GDP decrease than China and Korea (Non-Annex countries).10 Mani and Wheeler rank the dirtiest manufacturing industries by air, water, metals, and overall. The top 10 ranked industries that pollute air are as follows: Iron and steel, Nonferrous metals, Non-metallic mineral products, Petroleum products, Pulp and paper, Petroleum refineries, Industrial chemicals, Other chemicals, Wood products, and Glass products.

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share with a difference of -0.0000735835. These degrees in absolute value of industrial shrinkages

demonstrate each economy’s industrial structural dependence of production on the petroleum products. In

other words, Korea depends on petroleum products the most and induces the largest pollution generation

per output unit, whereas the U.S. depends on it the least and induces the least pollution generation per

output unit.

When this induced pollution generation per output unit is related to per-capita income, the simple

relationship shows the characteristics of the Environmental Kuznets Curve (EKC). Sakuramoto et al.

(2003) derive an inverted U-shaped distribution of the EKC using an Input-Output Model. They explain

that China would experience pollution generation in a similar pattern to ASEAN, NIEs, and Japan as it

increases its per-capita income. Arraying per-capita income in order of the U.S., Japan, Korea, and China

in this study, the same explanation for China can be applied to Korea, Japan, and the U.S. Countries such

as the U.S. and Japan, which have high per-capita income, would have a smaller dependence on

petroleum products than Korea because of the progress in energy efficient technology and environmental

regulations that are already in place. In this group, Korea is the middle-income country with the highest

dependence on fossil fuel that increases pollution. China is yet to produce more pollution as per-capita

income increases through economic development based on a higher dependence on petroleum products

per output unit.

<Table 3> 3 countries’ cross industrial output elasticities due to the U.S.' increase of an energy tax

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Industry China Japan Korea1. Agriculture, forestry, fishery, and mining 3.99E-06 1.19E-06 1.55E-062. Food, beverage, and tobacco 1.37E-06 -5.67E-07 -5.53E-073. Textile, leather, and related products 2.85E-06 9.36E-07 -8.17E-074. Timber and wooden products 7.89E-06 -4.44E-06 -3.26E-065. Pulp, paper, and printing 3.28E-06 1.74E-06 8.60E-076. Chemical products 4.00E-06 1.26E-06 -0.0000817. Petoleum products 6.60E-06 -1.18E-06 0.00001048. Rubber products 5.63E-06 7.84E-06 -5.57E-079. Non-metallic mineral products 4.86E-06 3.00E-06 -2.43E-0610. Metal products 8.39E-06 6.57E-06 9.03E-0611. Machinery 5.61E-06 7.81E-06 0.000012812. Transport equipment 3.29E-06 4.99E-06 3.05E-0613. Other manufacturing products 9.27E-06 2.29E-06 -0.00001214. Electricity, gas, and water supply 5.14E-06 2.40E-06 -1.84E-0615. Construction 1.17E-07 1.84E-07 2.95E-0716. Trade and transport 5.99E-06 2.62E-06 -2.37E-0617. Services 2.24E-06 1.01E-06 4.66E-0618. Public administration 0 3.09E-08 0

Sum of output elasticities 8.0488E-05 3.768E-05 -6.2177E-05

<Table 3> shows the cross industrial output elasticities of China, Japan, and Korea when the U.S. is the

only country to initiate an increase in energy taxes. China benefits the most by increasing production to

the sum value of (8.049E -05) and having no industries that are negatively affected. Japan has the sum

value of (3.768E -05) with overall positive effects on production despite negative effects on three

industries: No. 2. Food, beverage, and tobacco, No. 4. Timber and wooden products, and No. 7.

Petroleum products.

Korea, however, shows the negative sum value of -6.22E -05, which indicates an overall contraction of

production activities. The negative effects on nine industries exceed the positive effects of the other nine

industries, resulting in a negative sum value. Korea is the only country to have its economy negatively

affected by the U.S.’ increase in its energy tax. Thus, the production structure of Korea depends strongly

on the economic situation of the U.S. The Korean economic production structure is correlated to the U.S.’

adversities compared with China and Japan.

Just as Korea has an industrial structure that is vulnerable to its own pollution abatement policies,

Korea also has an industrial structure that makes it the country that is the most vulnerable to the U.S.’

adoption of a pollution abatement policy. China, on the other hand, is stronger because all 17 industries

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increase output in response to the U.S.’ environmentally stringent policy. With regard to the air polluting

industries, all seven values of output elasticities in China are positive, whereas in Japan and Korea there

are five and three11 positive values, respectively.

3.2. Net export change<Table 4> Trade deficit of the U.S. by country due to the U.S.’ adoption of an energy tax

Country TotalNet Export (A)

Total WorsenedNet Export (B) % (B/A) Worsened Net Export in Air

Polluting Industries (C) % (C/B)

China -$12,668,974 -$81 0.0006% -$44 54.21%Japan -$20,660,692 -$179 0.0009% -$87 48.66%Korea -$329,507 -$135 0.0409% -$109 80.87%Total -$33,659,173 -$395 0.0012% -$240 60.78%

* $: U.S. dollar (thousand dollars)

<Table 4> is rearranged from Appendix B, which details the changes by industry. For the sake of

simplicity, here, we classify these changes by polluting industries and less-polluting industries. The Total

Net Export column in <Table 4> shows that before the U.S. increases its energy tax, it has negative net

exports (trade deficit) from China, Japan, and Korea in the intermediate input trade by -$13 billion, -$21

billion and -$0.3 billion, respectively. These negative net exports total $34 billion, which is 0.19% of the

US’ total output of 18 trillion dollars.

The third column, Total Worsened Net Export, shows the U.S.’ worsened intermediate input trade with

China, Japan, and Korea after it implements an environmentally stringent policy. The worsened amount in

trade deficit is -$81 thousand, -$179 thousand, and -$135 thousand with China, Japan, and Korea,

respectively. The percentage values of the trade deficit increases are 0.0006% with China, 0.0009% with

Japan, and 0.0409% with Korea. Unlike in the case of industrial output elasticities discussed in <Table

3>, China benefits the least with the U.S. China does not increase its trade surplus with the U.S. as much

as Japan and Korea. This result will be explained below where <Table 5> is discussed.

Amidst the overall production decrease from <Table 3>, Korea obtains the most in trade with the U.S.

Korea tends to show competitiveness in polluting industries and a greater possibility of a “pollution haven

effect”12 through its higher share (80.87%) of air polluting industries in its increase in the negative net

11 Even if Korea has a smaller number than Japan, we note that Korea has the largest elasticity increase in the No. 7. Petroleum products industry with 0.00001040 among all elasicities of three countries. This result suggests that Korea is competitive in only the dirty industry amidst shrinkage in overall production activities.12 Zeng and Zhao (2009) describe that it is more plausible that a pollution haven may not arise if environmental regulation is slightly more stringent in the larger country because the amount of change in trade is very small. We assert, however, that it is more plausible that a pollution haven arise because the production structure in the Korean economy has changed overall.

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export compared with Japan (48.66%) and China (54.21%). The U.S. increases its import of higher-

pollution-related goods at a higher proportion (60.78%) and less-pollution-related goods at a lower

proportion (39.22%) from the northeast Asian countries as it increases its trade deficit. We cannot see a

comparative advantage such as any improvement in the U.S. export instead of an increase in import

overall. This result is different from the findings of Robison (1988): when the U.S. implements a stringent

pollution abatement system, more higher-pollution-related goods are imported to the U.S. and more less-

pollution-related goods are exported from the U.S. Our study demonstrates an overall deepening negative

net export by showing that a larger share of import is in higher-pollution-related goods. Rather, our study

shows the phenomenon asserted by Levinson (2011) that the imports grow from industries that are not

pollution intensive.

As we see from the percentage increase in the prices of industries in Appendix C, the price increases of

the U.S. are higher than those of the other three countries from the U.S.’s increase of an energy tax. The

reason why all prices are affected is that all industries in the U.S. are more strongly related, directly or

indirectly, to other domestic industries than corresponding industries in other countries. This relationship

makes the U.S. products less competitive in the international market, and it makes the U.S.’ prices of

intermediate inputs relatively weaker.13

<Table 5> Change in the Net Export by country due to the U.S.’ increase of an energy taxCountry Export (X)- Import (M) China Japan Korea

Net Export -$10,049,763,000 -$11,376,671,000Change in Net Export $317 (0.000003%)↑ $9,602 (0.000084%)↑

Net Export $10,049,763,000 $8,650,161,000Change in Net Export $317 (0.000003%)↓ $8,055 (0.000093%)↑

Net Export $11,376,671,000 -$8,650,161,000Change in Net Export $9,602 (0.000084%)↓ $8,055 (0.000093%)↓

China

Japan

Korea

* $: U.S. dollar.

The change in net export among the three countries after the U.S.’ increase in energy tax is shown in

<Table 5>. China has a negative net export (trade deficit) with Japan and Korea. Japan has a positive net

export (trade surplus) both with China and Korea. Thus, Korea has a positive net export with China and a

negative net export with Japan. When the U.S. implements the energy tax increase, we can see the

13 In the trade relation of country ‘s’ with ‘r’ from equation (e), X−M=αij

sr p jr x j

r

pis −

α ijrs p j

s x js

pir , the enlarged pi

s in region ‘s’

and the less enlarged p jr in region ‘r’ will make the relative price ( p j

r / pis) smaller in export. In import, the relative price ( p j

s / pir)

becomes larger. Thus, the net export (X-M) becomes smaller, and region ‘s’ loses its competitiveness over region ‘r’. 14

direction of change in the net export even if the changed amounts are very small.14 The U.S.’ increase of

its energy tax narrows the Chinese gap of the negative net export with Japan and Korea by $317 and

$9,602, respectively, which is 0.000003% and 0.000084%, respectively. On the other hand, the net export

of Korea decreases with China and Japan by $9,602 and $8,055, respectively, which is 0.000084% and

0.000093%, respectively. Accordingly, Japan’s net export becomes worse with China but improves with

Korea.

This finding shows that while China has the smallest competitive advantage over the U.S. from <Table

4>, China has a competitive advantage over Japan and Korea in the northeast Asian region. As we can see

from <Table 3>, this advantage allows China to obtain more benefits than Japan and Korea when the US

implements stringent environmental regulation. In case of Korea, when we look at the changes in prices

in Appendix C, it has a close tie with the U.S. in the production process. The U.S.’ stringent regulation

increases all prices in all industries in Korea. While the regulation affects Korea the most, it affects China

the least. Amidst adversities, Korea shows relative price competitiveness in air polluting industries in the

U.S. market in <Table 4> because the price increases are not higher than those in the U.S. However, the

price increases would make Korea the least competitive of the countries in the northeast Asian region.

China will benefit the most and Korea will benefit the least, and as we can see in <Table 3>, extending

the model to the rest of the world will make China better off and Korea worse off. The variable f (final

demand) in the equation (d) contains the net export of the rest of the world as a fixed value. If we put this

value into the intermediate input flows beyond the northeast Asian region, then it would have a positive

effect on China and a negative effect on Korea.

4. CONCLUDING REMARKSThis paper has made a step towards a multiregional analysis of a detailed assessment of environmental

regulation on scenarios of a regional effort by four countries and a solo effort by the U.S. The output

elasticities of the impact were derived by industry level under the assumption that there was an increase in

the energy tax on the petroleum products industry. The total output changes derived from the output

elasticities indicate that there is a reduction in output in the overall economy regardless of whether the

country is developed or developing. In terms of the production process of a country’s overall economy,

Korea appears to be the most vulnerable and Japan the second most vulnerable. The U.S. is the least

vulnerable.

When a country unilaterally initiates an environmental regulation, even when it is a less affected

country like the U.S., we find that there is a reduction in production activities in the economy and a loss

of international price competitiveness. The implications of this work seem to be reflected in the climate

conferences by the desire of each major pollution-emitting country to commit only to its reduction target

14 These dollar values are not in units of thousand or million. 15

under the condition that the agreement of targets includes the participation of all major pollution-emitting

countries. This phenomenon leads us to conclude that a sole initiator loses and most of the bystanders

who do not participate can benefit even if with an exceptional case like Korea, as we show in our study.

The change of net export in the trade of intermediate input for producers suggests there is a change in

the production structure of each country even if those changes are very small. If we deal with the larger

set of data that combines producers and consumers, we cannot track the direction of structural change for

production activities in an economy. For the U.S., overall import increases, and a higher proportion of the

increase is in inputs of dirty industries compared with inputs of less-polluting industries. This increase

will make Korea specialize in dirty industry and shrink the overall total output of its economy. Japan will

then increase its export of commodities from less-polluting industries. China, however, according to the

analysis of the EKC, would take the position of Korea in dirty industry as its per-capita income increases

unless a drastic environmental policy change is made.

This study does not analyze the quantity of pollution emission using a pollution emission coefficient as

in other studies using input-output analyses. It is also not about energy tax revenue recycling to improve

the environment. We have focused only on the effect of stringent environmental regulation on production

change. We have not focused on productivity enhancement and the resulting changes of international

input trade. However, as we see in many other studies, we hope that these outcomes will be overcome by

a structural change through productivity enhancement. Testing the productivity enhancement is possible

through inter-temporal comparisons with the subsequent multiregional data, which will be our next study.

16

APPENDIX A: Output change due to an energy tax system by country (in U.S. dollars)

Appendix AIndustry Output Change in China by Industry Output Change in Japan by Industry

X dX X+dX X dX1 408,152,984 2,390 408,155,374 140,621,501 -4,918 2 180,359,772 650 180,360,422 360,184,206 -946 3 208,902,146 951 208,903,097 73,476,048 39 4 19,534,923 198 19,535,121 49,089,232 1,012 5 47,047,270 554 47,047,824 192,508,694 -576 6 188,765,743 -4,238 188,761,505 243,201,986 -9,139 7 95,985,424 -76,289 95,909,135 120,473,033 -285,433 8 22,402,072 64 22,402,136 26,279,984 -211 9 76,764,869 -569 76,764,300 77,656,702 -2,140

10 196,524,815 -5,710 196,519,105 336,741,321 -8,350 11 377,896,055 1,308 377,897,363 828,327,173 1,740 12 117,346,364 225 117,346,589 459,287,975 491 13 85,607,611 26 85,607,637 179,688,468 8 14 115,955,499 -5,436 115,950,063 219,175,965 -13,398 15 267,648,902 -805 267,648,097 717,364,399 -3,129 16 245,646,262 -4,825 245,641,437 1,259,010,000 -2,966 17 389,068,238 4,013 389,072,251 3,063,040,000 33,434 18 67,533,096 0 67,533,096 336,140,070 -20

Total 3,111,142,045 -87,493 3,111,054,552 8,682,266,757 -294,501

Industry Output Change in Korea by Industry Output Change in the U.S. by IndustryX dX X+dX X dX

1 36,158,074 -309 36,157,765 468,403,000 3,377 2 51,698,129 -227 51,697,902 556,293,000 141 3 39,945,263 -558 39,944,705 146,979,000 13 4 6,446,748 -13 6,446,735 139,742,000 90 5 20,456,971 -270 20,456,701 370,477,000 102 6 56,584,180 -7,742 56,576,438 442,644,000 -526 7 46,506,138 -67,494 46,438,644 245,976,000 -14,261 8 6,212,045 -128 6,211,917 34,683,000 8 9 14,286,217 -1,412 14,284,805 96,737,000 109

10 73,645,594 -3,450 73,642,144 460,017,000 295 11 159,571,984 -400 159,571,584 918,194,509 427 12 69,274,295 -45 69,274,250 787,818,000 156 13 25,594,925 -772 25,594,153 340,131,491 105 14 27,426,680 -1,034 27,425,646 416,053,000 258 15 87,637,988 -201 87,637,787 911,190,000 -104 16 106,638,519 -2,928 106,635,591 2,448,710,000 612 17 333,612,328 5,065 333,617,393 8,067,130,000 4,030 18 38,397,020 0 38,397,020 1,093,470,000 0

Total 1,200,093,098 -81,918 1,200,011,180 17,944,648,000 -5,166 X: Original data (thousand dollars), dX: Changed output due to an energy tax system

17

APPENDIX B: The change in intermediate input trade of the U.S. with China, Japan, and Korea

Originalnet export

Changednet export

Worsenednet export

Originalnet export

Changednet export

Worsenednet export1 154,519 154,516 -3 4,624,377 4,624,358 -19

2 -203,831 -203,832 -1 2,698,026 2,698,021 -53 -775,899 -775,900 -1 -349,614 -349,615 -14 -401,947 -401,948 -1 577,045 577,044 -15 487,674 487,673 -1 326,156 326,153 -36 1,305,665 1,305,650 -15 1,745,573 1,745,541 -327 -110,719 -110,743 -24 181,176 181,130 -468 -94,230 -94,230 0 -108,597 -108,598 -19 -66,274 -66,275 -1 257,080 257,079 -110 -333,021 -333,023 -2 -445,314 -445,318 -411 742,353 742,348 -5 -8,983,343 -8,983,357 -1412 -3,260,959 -3,260,962 -3 -12,853,025 -12,853,038 -1313 -204,854 -204,856 -2 -692,439 -692,444 -514 -166,785 -166,785 0 -193,431 -193,431 015 -3,974,011 -3,974,021 -10 -2,249,744 -2,249,750 -616 693,817 693,811 -6 4,539,620 4,539,599 -2117 -5,465,055 -5,465,058 -3 -7,888,056 -7,888,061 -518 -995,417 -995,419 -2 -1,846,182 -1,846,185 -3

Total -12,668,974 -12,669,055 -81 -20,660,692 -20,660,871 -179

Originalnet export

Changednet export

Worsenednet export1 823,944 823,941 -3

2 833,863 833,862 -13 -612,905 -612,906 -14 -98,114 -98,114 05 159,122 159,121 -16 1,698,780 1,698,769 -117 876,041 875,946 -958 -101,800 -101,800 09 48,352 48,352 010 9,161 9,159 -211 400,362 400,355 -712 -1,882,947 -1,882,949 -213 -81,357 -81,359 -214 -44,494 -44,494 015 -670,609 -670,611 -216 1,371,769 1,371,762 -717 -2,426,310 -2,426,311 -118 -632,365 -632,366 -1

Total -329,507 -329,642 -135

Industry Input trade with China Input trade with Japan

Input trade with KoreaIndustry

* U.S. dollars. (thousand dollars)

18

APPENDIX C: % increase in prices by country due to the U.S.’ increase in an energy taxPrice increases in % by each country's industry due to USA's adoption of carbon tax Industry U.S.

Korea 1. Agriculture, forestry, fishery, and mining 0.030.001 2. Food, beverage, and tobacco 0.0130.002 3. Textile, leather, and related products 0.0110.003 4. Timber and wooden products 0.0110.002 5. Pulp, paper, and printing 0.0110.002 6. Chemical products 0.0480.013 7. Petoleum products 0.9710.001 8. Rubber products 0.0140.004 9. Non-metallic mineral products 0.0120.002 10. Metal products 0.010.001 11. Machinery 0.0060.002 12. Transport equipment 0.0070.002 13. Other manufacturing products 0.0120.004 14. Electricity, gas, and water supply 0.0160.003 15. Construction 0.0260.001 16. Trade and transport 0.0210.003 17. Services 0.0060.001 18. Public administration 0.017

19

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