Environmental Dumping, Transboundary Pollution and Asymmetric Information. Some Insights for the Environmental Regulation of the European Electricity Market

In this paper we extend a model by A. Ulph (1997) on the relationship between free trade agreements, environmental regulation and trade under imperfect competition. Ulph's model focused on the effectiveness of harmonisation policies against ecological dumping. It turned out that harmonised policies are rarely optimal under perfect information, but some rationale for them is granted when asymmetric information between the Commission and national governments is considered. This paper analyses two extensions of that model: transboundary pollution and the inclusion of consumer's surplus. Our interest in these issues rests in their importance for the environmental regulation of the European electricity sector, where imperfect competition can be expected to prevail even after the opening of the Single Market. Allowing for consumers' surplus has a very limited impact on Ulph's conclusions, but considering transboundary pollution has important consequences. Under perfect information, it makes harmonisation a much more attractive option. Under asymmetric information, it affects the governments' incentives to misreport, making them stronger and changing the kind of report the Commission should be wary of, it calls for a much less differentiated treatment of the countries, and makes delegating the regulatory power to the Commission a more attractive option than acting non co-operatively.