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Strategic Environmental Policy under Free Trade with Transboundary Pollution

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  • Harvey E. Lapan
  • Shiva Sikdar

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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Suggested Citation

  • Harvey E. Lapan & Shiva Sikdar, 2011. "Strategic Environmental Policy under Free Trade with Transboundary Pollution," Review of Development Economics, Wiley Blackwell, vol. 15(1), pages 1-18, February.
  • Handle: RePEc:bla:rdevec:v:15:y:2011:i:1:p:1-18
    DOI: j.1467-9361.2010.00589.x
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    File URL: http://hdl.handle.net/10.1111/j.1467-9361.2010.00589.x
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    References listed on IDEAS

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    1. Kyle Bagwell & Robert W. Staiger, 2001. "Domestic Policies, National Sovereignty, and International Economic Institutions," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 519-562.
    2. Rauscher, Michael, 1997. "International Trade, Factor Movements, and the Environment," OUP Catalogue, Oxford University Press, number 9780198290506.
    3. Rodney D. Ludema & Ian Wooton, 1994. "Cross-Border Externalities and Trade Liberalization: The Strategic Control of Pollution," Canadian Journal of Economics, Canadian Economics Association, vol. 27(4), pages 950-966, November.
    4. 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.
    5. 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, August.
    6. Kazuharu Kiyono & Masahiro Okuno-Fujiwara, 2003. "Domestic and international strategic interactions in environment policy formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 613-633, March.
    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, August.
    8. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-737, September.
    9. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
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    Citations

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    Cited by:

    1. E. Kwan Choi, 2011. "Genetic Contamination of Traditional Products," CESifo Working Paper Series 3624, CESifo Group Munich.
    2. Nikos Tsakiris & Panos Hatzipanayotou & Michael S. Michael, 2015. "Welfare Ranking of Environmental Policies in the Presence of Capital Mobility and Cross-border Pollution," DEOS Working Papers 1513, Athens University of Economics and Business.
    3. Thomas Eichner & Rüdiger Pethig, 2012. "Stable Climate Coalitions (Nash) and International Trade," CESifo Working Paper Series 3915, CESifo Group Munich.
    4. Choi, E. Kwan, 2013. "Genetic contamination of traditional products," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 291-297.
    5. Chen, Xudong & Huang, Bihong, 2016. "Club membership and transboundary pollution: Evidence from the European Union enlargement," Energy Economics, Elsevier, vol. 53(C), pages 230-237.
    6. repec:kap:enreec:v:67:y:2017:i:1:d:10.1007_s10640-015-9980-3 is not listed on IDEAS
    7. 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.
    8. repec:aue:wpaper:1509 is not listed on IDEAS
    9. Harvey E. Lapan & Shiva Sikdar, 2017. "Can Trade Be Good for the Environment?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 267-288, April.
    10. Sikdar, Shiva, 2008. "Essays in macroeconomics, international trade and the environment," ISU General Staff Papers 2008010108000016832, Iowa State University, Department of Economics.
    11. Thomas Eichner & Rüdiger Pethig, 2015. "Is trade liberalization conducive to the formation of climate coalitions?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(6), pages 932-955, December.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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