Green lobbies and transboundary pollution in large open economies

We employ a common agency model of policy making to examine how green lobbies affect the determination of trade and environmental policies in two large countries that are linked by trade flows and transboundary pollution. We show that the impact of green lobbying on environmental policy outcomes depends crucially on the prevailing trade regime—cooperative or non-cooperative—on whether environmental agencies act in a unilateral or coordinated manner, and on the size of the emission leakages and transboundary spillovers. Under free trade, a unilateral increase in pollution taxes reduces domestic emissions at the cost of increased foreign emissions; in this case, if the emission leakages and the associated transboundary spillovers are large enough, green lobbying can create a bias towards lower pollution taxes.