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Strategic Environmental Policy under Free Trade with Transboundary Pollution

  • Harvey E. Lapan
  • Shiva Sikdar

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. 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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File URL: http://hdl.handle.net/10.1111/j.1467-9361.2010.00589.x
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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 15 (2011)
Issue (Month): 1 (02)
Pages: 1-18

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Handle: RePEc:bla:rdevec:v:15:y:2011:i:1:p:1-18
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  1. 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.
  2. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  3. 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.
  4. 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.
  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, 1997. "International Trade, Factor Movements, and the Environment," OUP Catalogue, Oxford University Press, number 9780198290506.
  7. 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.
  8. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-37, September.
  9. 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.
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