Strategic Environmental Policy Under Free Trade with Transboundary Pollution

Harvey Lapan and Shiva Sikdar

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

Abstract: We analyze the eff ects of trade liberalization on environmental policies in a strategic setting when there is transboundary pollution. Trade liberalization can result in a race to the bottom in environmental taxes, which makes both countries worse o ff. This is not due to the terms of trade motive, but rather the incentive, in a strategic setting, to reduce the incidence of transboundary pollution. With command and control policies (emission quotas), countries are unable to influence foreign emissions by strategic choice of domestic policy; hence, there is no race to the bottom. However, with internationally tradable quotas, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. Under free trade, internationally nontradable quotas result in the lowest pollution level and strictly welfare-dominate taxes. The ordering of internationally tradable quotas and pollution taxes depends, among other things, on the degree of international pollution spillovers.

Keywords: Free trade; Transboundary pollution; Strategic environmental policy; Carbon leakage; Race to the bottom. (search for similar items in EconPapers)
JEL-codes: D62 F18 H23 Q56 (search for similar items in EconPapers)
Date: 2007-05-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Review of Development Economics, February 2011, vol. 15 no. 1, pp. 1-18

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http://www2.econ.iastate.edu/papers/p11298-2007-05-07.pdf (application/pdf)

Related works:
Journal Article: Strategic Environmental Policy under Free Trade with Transboundary Pollution (2011)
Working Paper: Strategic environmental policy under free trade with transboundary pollution (2011)
Working Paper: Strategic environmental policy under free trade with transboundary pollution (2010)
Working Paper: Strategic Environmental Policy Under Free Trade with Transboundary Pollution (2008)
Working Paper: Strategic environmental policy under free trade with transboundary pollution (2007)
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