Trade and welfare effects of unilateral environmental regulation: The case of Malaysian palm oil

Some environmental problems transcend national boundaries and pose issues for international as well as domestic policies. The impacts of domestic environmental policy on the welfare of output and input suppliers are evaluated using a partial vertically integrated model. The model includes structural equations for the supply of and demand for the output and input taking account of the price and quantity effects from the world market. The structural equations are grouped into three blocks representing three integrated sectors in the Malaysian palm oil industry and are estimated simultaneously by three-stage (3SLS) and two-stage (2SLS) least squares methods. The restricted reduced form equations are derived and used to evaluate the policy impacts.The palm oil industry of Malaysia is chosen not only because it is the most polluting agro-based industry but also because it is internationally traded and because of its important contribution to the nation's economy. Despite all the successes palm oil has achieved for Malaysia and the problems it confronts in the world market, domestic problems arising from the rapid development of the palm oil industry has had serious consequences on the natural environment.Results support the hypotheses about the direction of the effects of environmental regulation, but these effects appear to be small and insignificant. The price of CPO increases and quantity produced decreases due to the additional cost incurred for reduction of BOD discharges as required by the regulation. Domestic demand decreases consequently, due to higher CPO price, ceteris paribus. In the input market, the demand for FFB shrinks following the reduction in the quantity of CPO production. Welfare losses due to the environmental regulation seem to be greater for FFB and RPO producers than the losses for CPO producers since the latter are relatively more flexible in adjusting their output supply than are RPO and FFB suppliers. RPO producers have inelastic demand for CPO and FFB suppliers have suppliers have highly inelastic supply schedule due to the perennial nature of the stock of oil palms.U of I OnlyETDs are only available to UIUC Users without author permissio