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The political economy of environmental regulations and industry compensation

Barbara Stoschek

No 65, University of Göttingen Working Papers in Economics from University of Goettingen, Department of Economics

Abstract: This paper uses a political-economy framework to analyze what consequences the exogenous introduction of a quantitative restriction on total emissions in a small open economy has on the stringency of domestic trade policy. The question is whether and to what extent the government, if it takes different lobby groups´ interests into consideration, has an incentive to compensate the polluting industry for stricter environmental regulations by granting higher protection to it. It turns out that the government will indeed tend to increase subsidization of the industry affected by environmental regulation. This compensation will even be more than complete as long as environmental interests are taken into account. Hence, contrary to what might be expected, a net benefit for the polluting sector arises from environmental restrictions.

Keywords: environmental regulations; international competitiveness; political (search for similar items in EconPapers)
JEL-codes: F18 Q52 Q58 (search for similar items in EconPapers)
Date: 2007
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