Strategic Environmental Policy Under Free Trade with Transboundary Pollution

18 Pages Posted: 24 Jan 2011

See all articles by Harvey E. Lapan

Harvey E. Lapan

Iowa State University - Department of Economics

Shiva Sikdar

affiliation not provided to SSRN

Abstract

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 off. 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.

Suggested Citation

Lapan, Harvey E. and Sikdar, Shiva, Strategic Environmental Policy Under Free Trade with Transboundary Pollution. Review of Development Economics, Vol. 15, No. 1, pp. 1-18, 2011, Available at SSRN: https://ssrn.com/abstract=1745778 or http://dx.doi.org/10.1111/j.1467-9361.2010.00589.x

Harvey E. Lapan (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515 294-5917 (Phone)

Shiva Sikdar

affiliation not provided to SSRN

No Address Available

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