The global welfare effects of internationalenvironmental cooperation 1

Stefan Csordás 2

University of Basel, Petersgraben 51, CH-4003 Basel, Switzerland

Abstract

This study explores the global welfare effects of international environmental agree-ments (IEAs) that coordinate emission policies between exporter countries. We showthat when export markets are imperfectly competitive, IEAs might cause a globalwelfare loss even if non-signatories benefit from lower emission levels. This resultis due to a loss in consumer surplus in importer countries. From a global welfareperspective, IEAs are only desirable if emissions are "harmful enough". Otherwise,the world as a whole is better off if no IEA between polluter countries is signed. Weargue that an IEA can accrue to little more than abusive export taxation in disguiseof environmental cooperation; and that governments could use IEAs to implementdetrimental trade practices outlawed by many international trade agreements.

Keywords: Strategic environmental policy, international environmental agreements

JEL classification: Q56, F18

1 Introduction

In the last decades, governments all over the world have signed a large numberof international environmental agreements (IEAs). There are more than 270IEAs in force today according to UNEP (2005); more than 120 of them weresigned after 1990.

Economic research on IEAs has largely focussed on issues of stability andcompliance. 3 In contrast, the global welfare effects of IEAs have not received

1 I wish to thank Frank Krysiak for numerous helpful comments and discussions.2 Tel.:++41 (0)61 267 33 45; fax: ++41 (0)61 267 27 59E-mail address: stefan.csordas@unibas.ch3 See e.g. Carraro and Sinisalco (1993) and Barrett (1994a).

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much attention.

A fully cooperative IEA, i.e. one that implements jointly optimal environ-mental policies necessarily improves total welfare of signatories. If such anagreement leads to less pollution, one is tempted to believe that, if any, thewelfare effects on non-signatories are positive and the world as a whole isbetter off with than without the IEA.

In this study we explore the global welfare effects of IEAs between govern-ments that have strategic trade policy incentives, and come to a more nuancedconclusion.

Our analysis departs from the following simple setting: The production of anexport good causes internationally mobile emissions. This scenario is quitecommon in many open economies. For example, St. Lawrence (2007) findsthat in Canada 46% of the industrial greenhouse gas emissions are due to theproduction of export goods.

From the literature on strategic environmental policy, 4 it is well known thatgovernments might use environmental policy as a proxy for strategic tradepolicy if the latter is not feasible. In such a situation, governments of exportingcountries choose weak environmental regulation in order to shift rents fromforeign firms to home firms. Signing an IEA on jointly optimal environmentalpolicies would break this strategic conflict between exporting countries andhence unambiguously improve their welfare. However, the global welfare effectsof such an IEA are less clear cut.

In this paper, we show that even if non-signatories benefit from lower emissionlevels, an IEA might reduce global welfare as the loss of consumer surplusin importing countries might outweigh all welfare gains. In particular, wedemonstrate that from a global perspective, the desirability of an IEA dependson the degree of harmfulness of emissions. We further argue that an IEA mightbe used to circumvent international trade regulation and implicitly introducedistortionary export taxation in disguise of environmental cooperation.

The remainder of this paper is structured as follows: Section 2 contains aliterature review; in section 3 a simple model is developed; section 4 explainsthe main findings, and in section 5 the conclusions are presented.

4 See the following section for a literature review.

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2 Literature Review

The seminal contribution by Brander and Spencer (1985) has laid the groundfor a rich body of literature on trade policy under imperfect competition.Brander and Spencer (1985) have shown that if export markets are imper-fectly competitive, interventionist policies become attractive. The reason forthis is the presence of rents that creates incentives for a "beggar-thy-neighbor"kind of trade policy (Brander, 1986). Through strategic policy setting, gov-ernments can shift rents from a foreign firm to a home firm. If outputs arestrategic substitutes, it is in the individual interest of exporting countriesto subsidize, whereas they would do better as a group without subsidies. 5 6

Thus, governments find themselves in a Prisoner’s Dilemma that leads to aPareto-suboptimal outcome.

Departing from Brander and Spencer (1985), there have been numerous studieson strategic trade policy investigating different variations of the original model.As the relevant literature up to the mid 1990s has been surveyed elsewhere(Brander, 1995), we will focus on the more recent studies.

One important branch of the literature is dedicated to strategic trade policiesunder incomplete information. In his study on optimal trade policies under de-mand uncertainty, Qiu (1995) comes to the conclusion that non-linear policiesstrictly dominate linear policies. Brainard and Martimort (1997) consider thecase of asymmetric information. They show that if firms have private infor-mation about their costs, optimal subsidies are lower (and possibly negative)than under complete information. Maggi (1996, 1999) finds that governments’incentives for interventionist trade policies can be augmented rather than re-duced by asymmetric information. Furusawa et al. (2003) and Ishikawa andKuroda (2007) have offered analyses of the informational requirements underwhich various trade policies are welfare-enhancing.

Another notable extension of the basic model emerged parallel to advancinginternational trade liberalization beginning in the 1990s. With direct exportsubsidies becoming largely illegal by GATT/WTO rules, "secondary" tradepolicies have gained increasing attention. Bagwell and Staiger (1994) showthat governments have incentives to subsidize R&D when export markets areoligopolistic and R&D activities lower expected costs.

Several authors have extended the Brander and Spencer (1985) framework tothe case of polluting industries. Research in the area of "strategic environmen-

5 In fact, exporters’ joint welfare-maximizing policy would be a negative exportsubsidy, i.e. an export tax (Brander and Spencer, 1985).6 Eaton and Grossman (1986) have shown that the opposite is true if outputs arestrategic complements.

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tal policy" has been spearheaded, among others, by Barrett (1994b), Rauscher(1994) and Ulph (1996). One general conclusion emerging from these studies isthat if the production costs of firms are positively related to the stringency ofdomestic environmental regulation, environmental policies will be laxer thanfirst-best. 7 However, Greaker (2003a) showed that the opposite is the case ifemissions are an inferior input. Conrad (2001) uses a reversed timing versionof Brander and Spencer (1985) in order to explain why firms engage in vol-untary environmental agreements. Investigating this issue in a model wherefirms are footloose, Greaker (2003b) comes to the somewhat surprising resultthat the threat of plant relocation can lead to stricter environmental policy.Burguet and Sempere (2003) analyze the effects of trade liberalization on en-vironmental policies and welfare.

To our knowledge, Walz and Wellisch (1997) are the only authors to includeworld welfare considerations in a model of strategic trade and environmentalpolicy. In this sense, it is the paper most closely related to ours. However,our analysis differs in two fundamental ways from that of Walz and Wellisch(1997). First, while Walz and Wellisch (1997) take pollution as being purelylocal, we consider globally mobile emissions. This adds an additional dimensionto the model, as pollution constitutes a negative externality, which has to betaken into account. Second, in Walz and Wellisch (1997), a move towardsfree trade is studied, i.e. direct export subsidies are allowed, and the welfareimplications of a ban on such subsidies are analyzed. We start our analysis ata point where export subsidies are already banned, which we believe comescloser to today’s reality. We then take the case of international environmentalcooperation, and analyze its global welfare effects. In this sense, our studytakes a new approach and arrives at results absent so far in the literature onstrategic environmental policy.

3 The model

For our analysis, we develop a version of the Brander and Spencer (1985)2-stage game, where, in the first stage, governments of polluter countries setenvironmental policies, and, in the second stage, firms play Cournot-Nash. Wethen make a welfare comparison between international environmental cooper-ation and non-cooperation by considering two different ways of policy settingin the first stage.

The model consists of three countries A, B and C (rest of the world). Incountries A and B there is one firm each, producing a normal homogeneousgood. The total production is exported to country C. The two firms compete

7 This result has become known as "eco-dumping".

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in quantities as a Cournot duopoly.

Production is accompanied by emission of a global pollutant for which gov-ernments set a standard.

In the first subgame, governments A and B simultaneously set emission stan-dards. 8 In the second subgame, firms simultaneously decide on output levels,taking emission standards as given. We solve the model by backwards induc-tion, considering the second stage of the game first.

3.1 Firms’ behavior

We will assume that the two firms are symmetric and neither has means toinfluence its government’s decision on the emission standard, so that each firmfaces the following profit maximization problem:

maxxi

Πi(xi, xj) = Ri(xi(ei, ej), xj(ei, ej))− Ci(xi(ei, ej), ei) (1)

with the subscript denoting the country, x being output, Π being profit, Rbeing revenue C being costs and e being the emission standard. We assumethat costs depend on the quantity of output produced and on the emissionstandard in the following manner:

∂Ci

∂xi

> 0,∂Ci

∂ei

< 0,∂2Ci

∂x2i

> 0,∂2Ci

∂e2i

> 0 and∂2Ci

∂xi∂ei

< 0 (2)

so that costs are convexly increasing in output and convexly decreasing inthe emission standard, respectively, and marginal costs are decreasing in theemission standard.

A first order condition for a profit maximum obtains from taking the partialderivative of (1) with respect to xi:

∂Πi

∂xi

=∂Ri

∂xi

− ∂Ci

∂xi

= 0 (3)

We assume that the second order condition and the Routh-Hurwitz stabilityconditions are satisfied so that the Cournot-Nash equilibrium is unique and

8 As there is only one firm per country, taxes and standards are equivalent. Hence,all results obtained in our analysis also hold for the case of emission taxes.

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stable. 9 Furthermore, the firms’ output choices are strategic substitutes:

∂2Πi

∂x2i

< 0 (4)

|∂2Πi

∂x2i

| > | ∂2Πi

∂xi∂xj

| (5)

∂2Πi

∂xi∂xj

< 0 (6)

Lemma 1. Equilibrium output of firm i increases (decreases) in the emissionstandard of country i (j).

Proof. It follows directly from the total differential of equations (3) and re-arranging that:

dxi

dei

=

∂2Ci

∂xi∂ei[∂2Rj

∂x2j− ∂2Cj

∂x2j

]

[∂2Ri

∂x2i− ∂2Ci

∂x2i][∂2Rj

∂x2j− ∂2Cj

∂x2j

]− ∂2Rj

∂xj∂xi

∂2Ri

∂xi∂xj

(7)

By assumptions (2), (4) and (5), both nominator and denominator are positiveso that dxi

dei> 0.

An analogous calculation yields:

dxi

dej

= −∂2Cj

∂xj∂ej

∂2Ri

∂xi∂xj

[∂2Rj

∂x2j− ∂2Cj

∂x2j

][∂2Ri

∂x2i− ∂2Ci

∂x2i]− ∂2Rj

∂xj∂xi

∂2Ri

∂xi∂xj

(8)

Both terms of the nominator are negative by assumptions (2) and (6), re-spectively, while it follows from (5) that the denominator is positive. Hence,dxi

dej< 0. 2

As the two firms are symmetric and the equilibrium is unique, the firms’output choices will be symmetric functions of the emission standards in bothcountries.

9 See Tirole (1988) chapter 5.7.

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3.2 Strategic government behavior

In the first stage of the game, the emission standard of country i is determinedby government i that maximizes welfare, i.e., it takes the Cournot-Nash gameof the firms and the strategic choice of ej by government j as given, and choosesei that maximizes the following objective function:

maxei

Wi(ei) = Ri(xi(ei, ej), xj(ei, ej))− Ci(xi(ei, ej), ei)− γD(ei + ej) (9)

where W is welfare, consisting of the firm’s profits (revenues R minus costsC) minus damage from emissions (D). The damage parameter γ is a measurefor the "harmfulness" of emissions. The higher γ, the higher is the damagecaused by emissions in welfare terms.

We assume that damage is a convex function of total emissions:

∂D(E)

∂ei

> 0 ,∂2D(E)

∂e2i

> 0 (10)

with E = ei + ej.

Differentiating (9) with respect to ei yields a first order condition for a welfaremaximum:

∂Wi

∂ei

=∂Ri

∂xi

dxi

dei

+∂Ri

∂xj

dxj

dei

− ∂Ci

∂xi

dxi

dei

− ∂Ci

∂ei

− γ∂D

∂ei

= 0 (11)

The first and the third term of the RHS cancel by (3) so that (11) simplifiesto:

γ∂D

∂ei

=∂Ri

∂xj

dxj

dei

− ∂Ci

∂ei

(12)

Equations (12) say that at the optimal emission level, marginal damage equalsmarginal profit for each country, i.e. marginal social costs equal marginal socialbenefit.

Again we assume that the second order conditions and the Routh-Hurwitzconditions are satisfied.

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Considering the firms’ behavior in the second stage and the government be-havior in the first stage, equilibrium emission standards and output levels canbe calculated. As country A and country B are identical, a unique symmet-ric equilibrium obtains, which we call the "Nash-Cournot-Nash" equilibrium(NCN):

eNCNi = eNCN

j = eNCN (13)

xNCNi = xNCN

j = xNCN (14)

From the point of view of exporter countries, these NCN emission standardsare not jointly optimal.

Lemma 2. In NCN, a decrease in emission standards leads to an increase inexporters’ joint welfare.

Proof. In NCN, a unilateral change in the emission standard of country i hasthe following effect on exporters joint welfare (Wi+j):

∂Wi+j(ei, ej)

∂ei

=∂Wi(ei, ej)

∂ei

+∂Wj(ei, ej)

∂ei

. (15)

The first term of the RHS of (15) equals zero by the first order condition ofgovernment i. The second term equals:

∂Rj

∂xi

dxi

dei

− γ∂D

∂ei

(16)

The first term of (16) is negative by the assumption that the exported goodis normal and by Lemma 1, respectively. The second term is positive by(10). 2

Hence, by a marginal decrease in the allowed emission level in one country,the exporters’ joint welfare increases. This result is analogous to the resultobtained by Brander and Spencer (1985) on export subsidies and highlightsthe Prisoner’s Dilemma faced by exporter countries. The individually rationalchoice of exporter countries leads to a jointly suboptimal outcome. Branderand Spencer (1985) do not analyze the cooperative case (correctly) pointingout that countries could not credibly commit to cooperation. However, inrepeated Prisoner’s Dilemmas, cooperation can be sustained as equilibrium.While our model is not explicitly dynamic, one could imagine that governmentsface the decision whether or not to honor an IEA every period, rather than

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once and for all (which corresponds to the one-shot Prisoner’s Dilemma), andthus cooperation is a relevant and important case to be considered.

3.3 Government cooperation

Let us now take the case of an IEA. If the governments cooperate in settingemission standards, they solve the following joint optimization problem in thefirst stage of the game (arguments are suppressed for brevity):

maxei,ej

WA+B = Ri − Ci + Rj − Cj − 2γD (17)

The first order conditions yield:

γ∂D

∂ei

=∂Ri

∂xj

dxj

dei

− ∂Ci

∂ei

− γ∂D

∂ei

+∂Rj

∂xi

dxi

dei

(18)

The RHS of (18) contains two additional terms as compared to (12) reflectingthat the governments now take into account the effects the emission standardin one country has on environmental damage and revenues in the other country.These additional terms reduce emission standards in the resulting symmetricequilibrium which we designate as "Cooperation-Cournot-Nash" equilibrium(CCN):

Proposition 1. In the CCN case, emission standards and output levels arestrictly lower than in the NCN equilibrium.

Proof. The proof follows straightforwardly from Lemma 2. At NCN, loweringthe emission standard in either country increases the exporter’s joint welfare.Therefore, the joint welfare maximizing symmetric emission standard must liebelow the NCN level. It follows that eCCN < eNCN . As the firms’ equilibriumoutput levels are strictly increasing in the emission level by Lemma 1, eCCN <eNCN ⇐⇒ xCCN < xNCN . 2

The rationale behind Proposition 1 is explained by the fact that the emis-sion standards influence welfare via two channels. First, emission standardsdetermine the magnitude of global environmental damage so that the inter-nalization of the external effect that polluter countries impose on each otherleads to the choice of a lower emission standard and thus lower output as com-pared to the Nash case. Second, emission standards indirectly control output.By choosing a lower emission standard, governments shift the firms’ reactionfunctions inwards in order to reduce output and extract higher rents from the

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rest of the world. Hence, welfare of exporting countries is increased by both,lower emissions and higher profits.

4 World welfare

What are the effects of international environmental cooperation on globalwelfare? Let us first define global welfare as the sum of welfare in the threecountries A, B and C:

WG = 2WE + WI (19)

with WE being welfare of an exporting country and WI being welfare of theimporting country corresponding to:

WI = U(X)− P (X)X − γD(ei, ej) (20)

where X is total output, P(X) is the inverse demand function which we assumeto be well-behaved, 10 and the first two terms of the RHS together are netconsumer surplus.

Clearly, the net welfare effect of an IEA between exporting countries on therest of the world is a priori ambiguous.

On the one hand, consumer surplus in the CCN setting is lower than theNCN level (’supply effect’). On the other hand, less production also causesfewer emissions and thus, less environmental damage (’pollution effect’). Ingeneral, either effect could dominate.

If the supply effect is outweighed by the pollution effect, the net global welfareeffect of an IEA is positive. However, if the opposite is true, one has to weighthe welfare loss in the rest of the world against the welfare gains of exportersin order to determine the sign of the net global effect.

Summarizing these findings, we can distinguish three cases. First, an IEA couldincrease welfare of both exporters’ and the rest of the world. In that case, theIEA unambiguously improves world welfare. Second, exporters’ welfare couldincrease while the rest of the world loses. If the welfare loss of the rest of theworld is relatively small, the welfare gain of the exporters is greater than theloss of the importer so that the world as a whole is better off with the IEA.

10 We assume the existence of a demand function X(P) that is continuous and strictlydecreasing wherever X(P)>0; P(X) is the implied inverse demand function.

10

Theoretically, exporters could compensate the rest of the world for their loss.Third, if the rest of the world suffers a relatively big welfare loss by the IEA,the world as a whole is worse off with the IEA.

In determining which case applies, the damage parameter γ plays a crucialrole. The higher γ, the higher weighs the pollution effect against the supplyeffect. In order to illustrate this point we shall analyze how global welfarebehaves as a function of γ under CNN and NCN, respectively (see Figure 1).We begin by considering the limit case γ → 0.

Lemma 3. When emissions cause no damage, the global welfare effect of anIEA is strictly negative:

limγ→0

∆WG < 0

with ∆WG ≡ WCCNG −WNCN

G

Proof. Consider once again equations (9) and (17), which characterize thegovernment’s problem in the Nash and the cooperative case, respectively. Ifγ = 0, the last terms disappear, which means that the government’s objectivebecomes identical to the firm’s problem of profit maximization, and globalwelfare equals total surplus. It follows that, in the Nash case, the outcome isa Cournot-duopoly, whereas in the cooperative case, the resulting equilibriumis a collusive duopoly, i.e. a two firm monopoly. Hence, the world as a wholesuffers a deadweight welfare loss if an IEA is signed. 2

Lemma 4. Global welfare in both NCN and CCN are decreasing in γ. How-ever, the former is decreasing at a higher rate than the latter. Hence, thehigher γ, the better is an IEA in world welfare terms.

Proof. It follows from the envelope theorem that

∂WNCNG

∂γ= −3D(ENCN)

and∂WCCN

G

∂γ= −3D(ECCN)

By Proposition 1, ENCN > ECCN which proves the result. 2

We have established that the global welfare effect of an IEA (∆WG) is neg-ative at γ = 0 and increasing in γ. However, in order to show that ∆WG

indeed becomes positive above some critical value of γ, i.e. that internationalenvironmental cooperation is improving global welfare when the emissions are"harmful enough", we need to analyze the behaviour of the function WCCN

G (γ)as γ reaches a prohibitively high level.

Let us define γCCNc as the value at which welfare of an exporting country

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under CCN becomes zero. For γ > γCCNc , production leads to negative welfare

values for exporter countries. However, this cannot be a feasible outcome of thecooperative game as governments jointly can always guarantee themselves awelfare level of zero by prohibiting production of the good altogether. Clearly,also global welfare under CCN is zero at γCCN

c , because at the point wherethe environmental damage reaches its prohibitive level there is no productionnor emission. However, under NCN, there is still production at γCCN

c as theindividually optimizing governments only take the environmental damage inthe own country into consideration. 11 This insight takes us to the next stepof the analysis.

Lemma 5. WNCNG (γCCN

c ) < WCCNG (γCCN

c ).

Proof. By construction, there are no consumers in country C willing to pay aprice high enough to fully compensate countries A and B for the productioncosts and the environmental damage in both countries at γCCN

c . In other words,it is better in global welfare terms not to produce. Hence, the world as a wholeis worse off when production takes place, i.e. under NCN. 2

Finally, we can establish the following result:

Proposition 2. There exists a value γ∗ ∈ ]0, γCCNc ] for which

γ < γ∗ ⇔ ∆WG < 0

andγ > γ∗ ⇔ ∆WG > 0

Proof. The result follows directly from Lemma 3 through 5 and the interme-diate value theorem. 2

Proposition 2 contains the main insights of the analysis. The governments ofthe exporting countries have two policy objectives. First, there is the environ-mental policy goal, namely minimizing damage from emissions. Second, thereis the trade policy goal, namely securing maximal rents.

If exporting countries act strategically, governments seek to increase the homecountry’s market share by implicitly subsidizing exports through lax environ-mental regulation. This beggar-thy-neighbor policy favors the rest of the worldin terms of consumer surplus as output is higher than in the cooperative case.However, higher production also leads to higher emissions which harm the restof the world.

If exporting countries cooperate, the strategic interaction between the govern-ments is broken and exporters can implement their jointly optimal environ-

11 It follows from Proposition 1 that at the prohibitive level of γ, xNCN > 0.

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Figure 1. The critical damage parameter γ∗

mental regulation, which will lead to lower output. The rest of the world thusloses in terms of consumer surplus, but benefits from lower emissions.

The parameter γ determines the relative weight of the two policy objectivesin the welfare functions.

If γ is relatively low, the trade policy goal outweighs the environmental pol-icy goal in the exporters welfare function. As the objectives of the exportersand the rest of the world are congruent concerning environmental policy butdiametrically opposed concerning trade policy, the rest of the world prefersthat no IEA is signed. This is due to the fact that when exporter countriesact strategically, their ability to pursue the trade policy objective (extractingrents) is lower than in the cooperative case.

If γ is relatively high, emissions are relatively harmful so that the rest of theworld prefers that an IEA is signed. If exporter countries act cooperatively,they will extract more rents from the rest of the world, but lower emissionlevels more than outweigh this negative welfare effect.

From a world welfare point of view, an IEA is only preferred if γ lies abovesome critical value, i.e that emissions are "harmful enough" so that the globalenvironmental effect dominates the loss in total surplus.

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5 Concluding remarks

In this paper we have shown that IEAs in imperfectly competitive marketenvironments carry various implications for the welfare of signatories and therest of the world. Alongside the obvious positive welfare effect of the inter-nalization of an environmental externality, negative welfare effects accrue dueto a loss of consumer surplus. While signatories of IEAs are always better offwith than without such an agreement, non-signatories might suffer a net lossin welfare even if they benefit from reduced global emission levels. This wel-fare loss potentially outweighs all positive welfare effects stemming from theIEA, so that the world as a whole is worse off if polluter countries cooperatein setting emission policies.

In line with most of the literature on strategic trade and environmental policy,we made the simplifying assumptions of complete symmetry and that there isno home consumption in exporter countries. Symmetry allows us to abstractfrom effects due to differences of countries and firms and focus fully on theeffects of strategic incentives on the nature of IEAs between exporter countries.The third market assumption simplifies the analysis at little cost in terms ofgenerality. As long as domestic consumption in exporter countries is smallrelative to total production, our results do not change qualitatively.

Brander and Spencer (1985) have explained the source and mechanism ofstrategic incentives that induce governments to subsidize exports when exportmarkets are imperfectly competitive. Barrett (1994b) has showed that thesestrategic incentives translate into distorted environmental policies when directtrade policies are infeasible and environmental policy is used as a proxy. Wefind that exporters might profit from their strategic advantage vis-à-vis the restof the world by signing an IEA that serves as a tool not only for internalizingexternal effects, but also for extracting rents. Such an IEA is de facto also atrade policy contract as it implicitly provides for export taxation by puttingin place strict environmental regulation.

Apart from their theoretical contribution, the results of this study inform thepolicy debate surrounding IEAs and the world trade system. While not illegalunder WTO rules, numerous important regional trade blocs, among these theEU, NAFTA and MERCOSUR, have prohibited export taxation (Piermartini,2004). Generally, economists and policy makers are aware of the distorting ef-fects of export taxes on international trade flows. However, member countriesof all international trade agreements are free to sign IEAs. The WTO recog-nized the interplay between IEAs and trade by the agreeing to "negotiations(...) on the relationship between existing WTO rules and specific trade obliga-tions set out in multilateral environmental agreements" (WTO, 2001). An IEAof the kind described in this paper does not hold any explicit trade obligations

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but only emission policy obligations, while potentially still having detrimentalwelfare effects analogous to those of direct trade intervention.

There are a large number of IEAs and their number is steadily increasing, andadvancing global trade liberalization makes environmental policy a more andmore attractive vehicle for the exertion of market power and the exploitationof strategic advantages. For these reasons we believe that that our findings areof both theoretical interest and practical relevance.

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