#29: Dr. Joseph Shapiro – The $800 billion Implicit Subsidy for Dirty Industries Due to Trade Policy

Sometimes you hear: “we should stop subsidizing dirty industries.” But are we actually doing that—and how big is it?

In this episode, I’m joined (again) by Professor Joe Shapiro (UC Berkeley) to discuss his paper “The Environmental Bias of Trade Policy” (QJE, 2021). Joe’s core finding is striking: dirty industries tend to face lower trade protection, while cleaner industries face higher trade protection—a pattern that appears across countries, years, and even non-tariff barriers. 

Joe then translates that pattern into an intuitive metric: if you interpret existing trade policy as a carbon tariff, it looks like an implicit carbon subsidy of around -$100 per ton of CO₂ (roughly -$85 to -$120/tCO₂) or  $550 to $800 billion dollars per year. In other words, goods with higher embedded emissions often face less trade protection—trade policy gets the magnitude “about right,” but the sign wrong. 

We unpack what drives this: tariff escalation linked to “upstreamness” (upstream, commodity-like inputs tend to be dirtier and receive lower protection; downstream consumer goods are cleaner and receive higher protection). 
Finally, Joe walks through his model-based simulations showing that harmonizing protection between clean and dirty goods could modestly raise GDP while meaningfully reducing global emissions. 

In this episode

• The key empirical fact: dirty industries have low tariffs; clean industries have high tariffs 
• The implied magnitude: ~-$100/tCO₂ “implicit carbon tax” embedded in trade policy 
• The mechanism: upstreamness → tariff escalation → environmental bias 
• What the simulations show when you “flatten” the bias across sectors 
• A surprising map result: countries with strong climate reputations can still have trade policy that tilts toward dirtier goods 

If you care about CBAM, industrial policy, or the political economy of decarbonization, this episode is a powerful reminder: trade policy can be climate policy—even when nobody intended it.

For questions, comments or suggestions, you can contact me at arvid.viaene.ce@gmail.com