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Strategic Environmental Policy Under Free Trade with Transboundary Pollution

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  • Lapan, Harvey E.
  • Sikdar, Shiva

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.

Suggested Citation

  • Lapan, Harvey E. & Sikdar, Shiva, 2007. "Strategic Environmental Policy Under Free Trade with Transboundary Pollution," Staff General Research Papers Archive 31298, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:31298
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    Cited by:

    1. Hwang, Sanghyun, 2022. "Is There an Environmental Race to the Bottom in an Endogenous Growth Model of Interjurisdictional Competition?," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 63(1), pages 24-50, June.
    2. Choi, E. Kwan, 2013. "Genetic contamination of traditional products," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 291-297.
    3. 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.
    4. Rui Wan & Jean-François Wen, 2017. "The Environmental Conundrum of Rare Earth Elements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(1), pages 157-180, May.
    5. E. Kwan Choi, 2011. "Genetic Contamination of Traditional Products," DEGIT Conference Papers c016_002, DEGIT, Dynamics, Economic Growth, and International Trade.
    6. 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.
    7. Harvey E. Lapan & Shiva Sikdar, 2019. "Is Trade in Permits Good for the Environment?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(2), pages 501-510, February.
    8. repec:aue:wpaper:1509 is not listed on IDEAS
    9. Thomas Eichner & Rüdiger Pethig, 2012. "Stable climate coalitions (Nash) and international trade," Volkswirtschaftliche Diskussionsbeiträge 155-12, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    10. Soham Baksi, 2014. "Regional versus Multilateral Trade Liberalization, Environmental Taxation, and Welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 47(1), pages 232-249, February.
    11. Nikos Tsakiris & Panos Hatzipanayotou & Michael S. Michael, 2017. "Welfare Ranking of Environmental Policies in the Presence of Capital Mobility and Cross‐Border Pollution," Southern Economic Journal, John Wiley & Sons, vol. 84(1), pages 317-336, July.
    12. 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.
    13. 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.
    14. E. Kwan Choi, 2011. "Genetic Contamination of Traditional Products," CESifo Working Paper Series 3624, CESifo.
    15. Sikdar, Shiva, 2008. "Essays in macroeconomics, international trade and the environment," ISU General Staff Papers 2008010108000016832, Iowa State University, Department of Economics.

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    More about this item

    Keywords

    Free trade; Transboundary pollution; Strategic environmental policy; Carbon leakage; Race to the bottom.;
    All these keywords.

    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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