DP8420 | Energy Demand and Trade in General Equilibrium: An Eaton-Kortum-type Structural Model and Counterfactual Analysis

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This paper sheds light on the role of the impact of taxes on energy production versus tariffs on imported goods for trade, energy demand, and welfare. For this, we develop a structural Eaton-Kortum type general equilibrium model of international trade which includes an energy sector. We estimate the key parameters of that model and calibrate it to domestic prices and production using data for 34 OECD countries and the rest of the world in the average year between 2000 and 2005. The model helps understanding the interplay between country-specific energy productivity, energy demand, and trade. The energy sector turns out to be an important determinant of the size of welfare gains from trade liberalization. We find that general import tariffs can be an effective instrument to reduce energy demand. For small open economies, taxing imports as an indirect instrument may be even preferable to taxing energy as a direct instrument from a welfare perspective, if countries pursue the goal of reducing energy demand to a specific extent. This is not the case for large countries such as the United States.