Environmental regulation and international trade

In this paper, we investigate how a country's choice of environmental policy instrument affects the international competitiveness of its firms. We show that in a Cournot-Nash equilibrium, the total market share of firms regulated through tradeable emission permits increases relative to that of the firms operating under command and control due to better allocation of total abatement among the firms in the country. Our work suggests that free trade situations should not only result in similar environmental standards but also in similar regulatory regimes. It may come as no surprise that the environmental authorities in Canada are seriously considering following the United States in instituting a tradeable emission permits mechanism.Most of the work was completed during the time that E.S. Sartzetakis was a post-doctoral fellow at the Department of Economics, Université Laval. He gratefully acknowledges the hospitality of the department during this period. Earlier, versions of the paper were presented at the fifth conference of the European Association of Environmental and Resource Economists and at the 1993 Rancontre Franco-Québécoise du GREEN. We would like to thank Joseph Doucet, Thomas Ross, and Aart de Zeeuw for extremely helpful suggestions. We would also like to thank two anonymous referees of this journal for their comments. Financial support from the LRSA of the Faculté des sciences de l'administration, Université Laval, the Groupe de rechearche en économie de l'énergie et des ressources naturelles (GREEN), Université Laval, and the Centre for International Business Studies (CIBS), University of British Columbia, is gratefully acknowledged. The responsibility for errors and omissions remains ours.