number of countries start to use charges or taxes to fulfill their environmental goals. In
addition to Slovenia other countries are also considering CO2 taxes. One of the main reasons
is the presumed positive effect on the labor market, the double dividend (Goulder 1995).
The environmental policies however have several repercussions on other areas such as
international trade flows, capital flows and technology transfers. The environmental policy
action of one country is likely to cause spillovers on other countries. The studies of spillover
effects deal mainly with the impacts of abatement policies on industrial competitiveness and
carbon leakage i.e. the reallocation of industries. In dynamic considerations technology
transfers may generate positive spillovers for the non-abating countries (Grubb 2000).
Competitiveness
International spillovers are mainly transmitted through changes in the terms of trade
(TOT). The terms of trade are measured as the ratio of the countries exports to its imports in
value terms. Terms of trade impacts imply a secondary benefit or burden of the primary
domestic policy. Carbon strategies influence directly the prices of fossil fuels, increase the
production costs of energy consuming industries, and reduce the comparative advantage of
the industries as they increase the relative costs of producing a good in that particular country.
This leads to the reduction of international competitiveness and will negatively affect the
energy intensive industries. However, the country may benefit from the improvement of the
terms of trade, when the emissions arise from the goods being exported, given that the
imperfect substitutability of goods allow to sell those goods for a higher price. In this case, the
overall welfare effect depends on the change in the terms of trade relative to the level of
abatement costs. Non-abating countries suffer symmetric welfare loses from more expensive
imports. However, empirical studies estimate that pollution abatement costs of developing
countries are about 1 per cent (and not exceeding 5 per cent) of the production costs
(Nordstrom and Vaughan 1999). They find that energy intensive industries tend to be capital
intensive and thus are not very likely to move to capital scarce countries like the transition
economies in Eastern Europe.
Carbon leakage
Unilateral abatement action may result in a movement of carbon emissions into non-
abating countries. This raises serious doubts on the environmental effectiveness of unilateral