The Uncertain Benefits of Environmental Reform in Open Economies

Jinhua Zhao, Larry Karp and Sandeep Sacheti

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: We compare the short-run and long-run effects of environmental reform and harmonization under autarky and free trade. When trade is driven by environmental distortions rather than real relative advantages, harmonization of environmental policies, even if achieved by lowering standards in one country, can improve short-run aggregate welfare. With the possibility of multiple steady states, long-run considerations favor a ``race to the top'' rather than a ``race to the bottom'' even when upward and downward harmonizations are equivalent in the short run. For a country trapped in a low (or bad) steady state, environmental reform may not move it to a high (or good) steady state under autarky. However, under trade, harmonization of policies may enable this country to reach the high steady state. Conversely, reforms that increase the relative differences in distortions may, under trade, cause economies to move to a low steady state.

Date: 2003-03-01
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Published in Journal of Environmental Economics and Management, March 2003, vol. 45 no. 2, pp. 246-264

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:5176

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