Pollution Policy and Trade Liberalization of Environmental Goods

During the Doha Round at the World Trade Organization, reductions in trade barriers on environmental goods (EG) were put forward as a means of helping developed and developing countries alike deal with current environmental problems. We examine the potential effectiveness of such a strategy in a developing country that imports all its consumption of EG from an imperfectly competitive foreign eco-industry. We point out that trade liberalization of EG might in fact lead to less stringent pollution taxes, which can result in an actual rise in pollution levels. We then show that the environmental effectiveness objective of this trade reform can be achieved when the regulator uses quantitative abatement standards as an alternative pollution policy instrument. However, this environmental achievement comes at the expense of social welfare.