Strategic environmental policy under free trade with transboundary pollution

Harvey Lapan and Shiva Sikdar

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: We analyze the effects 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 off. 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

Date: 2011-01-01
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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 (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)
Working Paper: Strategic environmental policy under free trade with transboundary pollution (2007)
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