ABSTRACT
Some environmentalists express concern that trade liberalization may damage the environment by giving governments incentives to relax environmental policies to give domestic producers a competitive advantage. Support for such concern may be given by models of imperfectly competitive trade where there may be “rent-shifting” incentives for governments to relax environmental policies. But there are also incentives for producers to act strategically, e.g., through their investment in R & D, and in this chapter I extend the literature on strategic environmental policy by allowing for strategic behavior by producers as well as governments. I show that (i) allowing for producers to act strategically on balance reduces the incentive for governments to act strategically; (ii) allowing governments to act strategically increases the incentive for producers to act strategically; (iii) welfare is lower when both parties act strategically; and (iv) strategic behavior by producers and governments is greater when governments use emission taxes than when they use emission standards.
© 1996 Academic Press, Inc.