Cooperation in Environmental Policy: A Spatial Approach

Inefficient competition in emissions taxes creates benefits from international cooperation. In the presence of cross-border pollution, proximate (neighboring) countries may have greater incentives to cooperate than distant ones as illustrated by a model of tax competition for mobile capital. Spatial econometrics is used to estimate participation in 37 international environmental treaties. Data on 41 countries from 1980-1999 reveal evidence of increased cooperation among proximate countries. Furthermore, the results indicate that FDI usually increases treaty participation. We also find that both OECD and non-OECD countries respond positively to OECD countries’ participation but the response to non-OECD countries is primarily from similar countries. This suggests that the rich countries may lead others in setting environmental quality.