International Environmental Policies and Environmental Lobbying in the Presence of Eco-industry

This paper analyses the political economy of environmental policies in the presence of an eco-industry pressure group. Previous studies have dealt with two types of lobbies: capitalists and environmentalists. We introduce a third pressure group representing the eco-industry sector. Under this type of economy, the incumbent government maximizes its chances of being re-elected. Its objective functions include social welfare as well as political contributions. The introduction of the eco-industry lobby introduces a new political contribution and modifies the incentives of the traditional lobbies. Furthermore, we underline the conditions under which environmentalists and eco-industries can become political allies. We also explain that, considering the overall profit of a vertical structure, an industrial lobby group can be favourable to a more stringent environmental policy. Next, we assume an open economy. In two countries, two polluting sectors are subject to an environmental policy. Therefore, an eco-industry sector which supplies pollution abatement goods and services arises. Abatement goods and services are assumed to be internationally traded, creating the only industrial interaction between both countries. The pollution, which can be transboundary or purely local, affects consumers in both countries; we analyse both cases. Our main findings can be summarized as follows. First, eco-industries lobby in favour of more stringent environmental policies, except if the impact of foreign competition more than compensates the turnover increase induced by a tighter environmental policy. Polluting firms always lobby against tighter environmental policies. However, an industrial pressure group, representing the industry as a whole and considering upstream and downstream profits, can sometimes be favourable to an increase in the environmental policy, as it leads to increased profits. We also show that an environmental pressure group can ask for a decrease in the environmental policy at home to decrease pollution abroad. This result does not rely on interactions between countries within the polluting sector. Interaction within the eco-industry sector is a sufficient condition for demonstrating that environmentalists can be favourable to a decrease in the local environmental policy. The impact of lobbying activities on the politically optimal environmental policy is ambiguous and depends on the relative concentration of each pressure group. Keywords: political economy, eco-industry, pollution abatement subsidies JEL classification: F12, H23, Q58