Environmental responsibility and policy in a two-country dynamic input-output model

Increased spatial dependency of economic activities, as well as spatial differentiation of production and consumption, has implications for environmental policy. One of the issues that has gained importance is the responsibility for the emissions from products that cross national boundaries during the environmental policy's lifetime. This paper discusses the different ethical views of environmental responsibility. Furthermore, the policy measures that are associated with the different viewpoints are analyzed in a novel dynamic two-country two-sector dynamic input-output model. A numerical example is modeled to assess taxing schemes that are based on these ethical viewpoints. The results show that a tax on the 'embodied' environmental pressure, which is generally viewed as ethically preferable, is less effective that the current policy of taxing consumers of products. Our discussion however shows that these results are very dependent on the model structure and initial parameters that are used. Nevertheless, the model illustrates that policies that are based on ethically superior standpoints may have detrimental distortionary effects in the dynamic setting.