Template-Type: ReDIF-Paper 1.0 Author-Name: J. Scott Holladay Author-Name-First: James Author-Name-Last: Holladay Author-Workplace-Name: Department of Economics, University of Tennessee Author-Name: Mohammed Mohsin Author-Email: mmohsin@utk.edu Author-Homepage: http://econ.bus.utk.edu/department/faculty/mohsin.asp Author-Workplace-Name: Department of Economics, University of Tennessee Author-Workplace-Homepage: http://econ.bus.utk.edu/ Author-Name: Shreekar Pradhan Author-Email: shreekar.pradhan@kapsarc.org Author-Homepage: https://www.kapsarc.org/researchers/shreekar-pradhan/ Author-Workplace-Name: King Abdullah Petroleum Studies And Research Center Author-Workplace-Homepage: https://www.kapsarc.org/ Abstract: We develop a dynamic stochastic general equilibrium model to understand how environmental policy instrument choice affects trade. We extend the existing literature by employing an open economy model to evaluate three environmental policy instruments: cap-and-trade, pollution taxes, and an emissions intensity standard in the face of two types of exogenous shocks. We calibrate the model to Canadian data and simulate productivity and import price shocks. We evaluate the evolution of key macroeconomic variables, including the trade balance in response to the shocks under each policy instrument. Our findings for the evolution of output and emissions under a productivity shock are consistent with previous closed economy models. Our open economy framework allows us to find that a cap-and-trade policy dampens the international trade effects of the business cycle relative to an emissions tax or intensity standard. Under an import shock, pollution taxes and intensity targets are as effective as cap-and-trade policies in reducing variance in consumption and employment. The cap-and-trade policy limits the intensity of the import competition shock suggesting that particular policy instrument might serve as a barrier to trade. Title: Environmental Policy Instrument Choice and International Trade Length: 49 pages Creation-Date: 2019-03 Revision-Date: Publication-Status: Revise and Resubmit File-URL: http://web.utk.edu/~jhollad3/RePEc/2019-01.pdf File-Format: Application/pdf File-Function: First version, 2019 File-Format: Application/pdf File-Function: Number: 2019-01 Classification-JEL: Q54, E32 Keywords: Environmental policy, Import competition, Business cycles, Macroeconomic dynamics, Open economy Handle: RePEc:ten:wpaper:2019-01