Document Type

Working Paper

Publication Date


Working Paper Number

WP #08017, October 2007; Old working paper #12931


We analyze the effects of free trade on environmental policies in a strategic setting with transboundary pollution. Trade liberalization can result in a race to the bottom in environmental outcomes, making both countries worse off. With command and control policies (quotas), there is no race to the bottom. However, with internationally tradable permits, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. In our model carbon leakage alone, and not a terms of trade motive, drives countries to relax domestic environmental policy. Quantity-based tools strictly welfare-dominate price-based tools under free trade.

Publication Status

Published as "Strategic Environmental Policy under Free Trade with Transboundary Pollution" in Review of Development Economics, Vol. 15 no. 1 (February 2011): 1-18.

JEL Classification

F18, H23, D62, Q56

File Format



30 pages

Included in

Economics Commons