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Strategic Environmental Policy Under Free Trade with Transboundary Pollution

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  • Lapan, Harvey E.
  • Sikdar, Shiva

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.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31298.

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Date of creation: 06 May 2007
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Publication status: Published in Review of Development Economics, February 2011, vol. 15 no. 1, pp. 1-18
Handle: RePEc:isu:genres:31298

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: Free trade; Transboundary pollution; Strategic environmental policy; Carbon leakage; Race to the bottom.;

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  1. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-37, September.
  2. Akihiko Yanase, 2007. "Dynamic Games of Environmental Policy in a Global Economy: Taxes versus Quotas," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 592-611, 08.
  3. Rauscher, Michael, 1997. "International Trade, Factor Movements, and the Environment," OUP Catalogue, Oxford University Press, number 9780198290506, September.
  4. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  5. Kyle Bagwell & Robert W. Staiger, 1999. "Domestic Policies, National Sovereignty and International Economic Institutions," NBER Working Papers 7293, National Bureau of Economic Research, Inc.
  6. Rauscher, Michael, 2005. "International Trade, Foreign Investment, and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 27, pages 1403-1456 Elsevier.
  7. Arja H. Turunen-Red & Alan D. Woodland, 2004. "Multilateral Reforms of Trade and Environmental Policy," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 321-336, 08.
  8. Ludema, R.D. & Wooton, I., 1992. "Cross-Border Externalities and trade Liberalization: The Strategic Control of Pollution," UWO Department of Economics Working Papers 9202, University of Western Ontario, Department of Economics.
  9. Kazuharu Kiyono & Masahiro Okuno-Fujiwara, 2003. "Domestic and international strategic interactions in environment policy formation," Economic Theory, Springer, vol. 21(2), pages 613-633, 03.
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Cited by:
  1. Thomas Eichner & Rüdiger Pethig, 2012. "Stable Climate Coalitions (Nash) and International Trade," CESifo Working Paper Series 3915, CESifo Group Munich.
  2. Michael S. Michael & Panos Hatzipanayotou, 2013. "Cooperative and Non-Cooperative Equilibrium Consumption Taxes in the Presence of Cross-Border Pollution," CESifo Working Paper Series 4501, CESifo Group Munich.
  3. E. Kwan Choi, 2011. "Genetic Contamination of Traditional Products," CESifo Working Paper Series 3624, CESifo Group Munich.
  4. Choi, E. Kwan, 2013. "Genetic Contamination of Traditional Products," Staff General Research Papers 37369, Iowa State University, Department of Economics.

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