Trade Competition, Veto Players, and Domestic Pollution

This paper examines conditions under which domestic political institutions mediate the effect of trade competition on regulatory races in the environmental area. We focus on the role of domestic veto players in shaping governments' policy responses to trade competition which are reflected eventually in air (Sulphur dioxide, SO2) and water pollution (Biochemical Oxygen Demand, BOD) intensity levels. Our analysis of 140 countries for the period 1980-2003 suggests that countries' air and water pollution intensity levels respond to pressures from trade competitors when political constraints faced by governments are low. As the number of veto players and their ideological heterogeneity increase, domestic pollution intensity levels become less responsive to the competitive pressure from trade. Importantly, in relation to water pollution, the constraining effect of veto players is more pronounced for air pollution ---visible pollution issue around which organized, urban constituencies tend to mobilize.

2010

This research note examines whether trade competition abets regulatory races in the environmental area+ To analyze trade competition, we develop a new measure, structural equivalence, which assesses competitive threats that a country faces from other countries whose firms export the same products to the same destination countries+ Employing this new measure, we analyze air pollution intensity~sulfur dioxide or SO 2 ! and water pollution intensity~biochemical oxygen demand or BOD! for a panel of 140 countries for the time period 1980-2003+ We find that trade competition is a significant predictor of water pollution intensity among structurally equivalent countries+ We then test separately whether trade competition abets upward and downward regulatory races+ We find that in the case of water pollution, countries respond symmetrically to downward and upward races, that is, they follow their structurally equivalent competitor countries both when they ratchet down their regulations and when they ratchet up regulations+ In the case of air pollution, however, countries are responsive to downward policy changes only in competitor countries+ This research note develops a new measure of trade competition, structural equivalence, and tests it in the context of the trade-environment debate+ 1 This measure captures competition among countries that export similar products to the same overseas markets+ We outline a new way to think about trade competition because much of the trade-environment literature tends to incorrectly equate trade competition with trade salience, the trade to gross domestic product~GDP! ratio+ Not

How do domestic political institutions, specifically veto players, mediate the effect of trade competition on regulatory races in the environmental area? Is the mediating effect more pronounced for more visible pollution issues such as air pollution in relation to less visible water pollution? Governments are expected to respond to trade pressures by lowering regulatory costs. To do so, governments can rewrite regulations (de jure policy change) and/or lower the enforcement of existing regulations (de facto policy change). In contrast with de facto changes, de jure policy changes are more likely to invite opposition from pro-environment constituencies, and are therefore politically more difficult. Our analysis of 140 countries for the period 1980-2003 suggests that in response to trade pressures, governments do not lower regulatory stringency by rewriting (de jure) environmental regulations for any level of domestic constraints. In contrast, when political constraints are low, governments respond to trade pressures by adjusting regulatory stringency via de facto changes. Moreover, in the context of de facto policy changes, the constraining effect of veto players is more pronounced for air pollution (sulphur dioxide) in comparison to water pollution (biochemical oxygen demand). This is because air pollution is a more visible pollution issue around which organized, urban constituencies tend to mobilize.

Review of Development Economics, 2011

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. JEL classification codes: F18, Q56, H23, D62.

2012

In this paper, we explore the use of trade policy in addressing transboundary stock pollution problems such as acid rain and water pollution. We show that a tariff determined by the current level of accumulated pollution can induce the time path of emissions optimal for the downstream (polluted) country. But if the upstream (polluting) country can lobby the downstream government to impose lower tariffs, distortions brought by corruption and foreign lobbying lead to a rise in the upstream country's social welfare, and to a decrease in social welfare in the downstream country. Thus, the usefulness of trade policy as a tool for encouraging cooperation and internalizing transboundary externalities depends critically on the degree of governments' susceptibility to foreign political influence. JEL classification: D72; F18; F59; Q56.

Journal of European Public Policy, 2008

Privredna izgradnja, 2003

This paper is only a first step towards an understanding of the effects of strategic environmental policy. Even the simple framework developed here provides interesting insights. As the precedent analysis has made clear, the optimal pollution policy under domestic distortions can be decomposed into a "domestic output effect", a "trade effect", and a "pollution effect". The "domestic output effect" captures the change in welfare coming from a change in domestic firms sale, the "trade effect" captures the change in welfare coming from a change in the level of imports, while the "pollution effect" captures the negative effect on welfare of domestic emissions. Then, the optimal pollution policy can imply a tax or subsidy for the domestic industry, which will depend on the specific characteristics of a given economy. This result emphasizes the idea, as is well known, that the outcomes for the case of one distortion do not hold i...

Applied Economics Letters, 2013

This paper analyses the impact of trade in pollution-intensive industries on the stringency of environmental regulation. Using System GMM regressions for a panel of 92 countries and the period 1998 to 2007, we find that an increase in net exports of pollution-intensive goods leads to a lowering of the stringency of environmental regulations.

Journal of Regulatory Economics, 2011

We consider a framework where firms which compete in an international product market are not all submitted to a pollution permit market. Using the Brander and Spencer's framework (J Int Econ 18:83-100, 1985), we seek to determine the optimal strategies of both a dominant firm in the pollution permit market and the regulator in a such context. We first show that the dominant firm pursues a strategic manipulation to increase its profit. We also find that the regulator uses a sophisticated strategic policy to increase the domestic welfare by using two instruments: the initial allocation of pollution permits and the pollution cap. Keywords Pollution permit market • Imperfect competition • Strategic trade policy JEL Classification Q58 • F12 • F18 1 Introduction The Kyoto Protocol which aims to curb the air pollution blamed for global warming came into force on February 2005. Annex I countries have to reduce their greenhouse gas emissions by a collective average of 5% below their 1990 levels by 2012. A number We are grateful for helpful comments from anonymous reviewers.

International Studies Quarterly, 2019

It is usually assumed that the cost of abating pollution is the main deterrent of domestic support for international climate cooperation. In particular, some scholars have argued that, due to the burden of pollution abatement, businesses commonly constrain governments, which then take less cooperative positions on global climate agreements. I suggest that this argument needs further qualification: pollution-related costs rarely have unconditional effects on preferences for global climate agreements. Instead, a sector's pollution level is more likely to influence preferences for climate cooperation if mediated by its trade exposure. If pollution is high, firms in high-trade sectors may be less able to absorb climate regulation, and hence they should be more sensitive to climate cooperation. If pollution is low, firms in high-trade sectors may support climate cooperation, because by being more efficient they are more capable of adjusting to regulation. These dynamics should then a...