The implications of international cooperation for economic growth, environmental quality and welfare

National authorities are presently not willing to install a supranational authority vested with the competencies required to internalize global environmental externalities. Therefore we adopt a dynamic framework of two economies (i.e. Europe and rest of world) and analyze their strategic interactions in the presence of international knowledge spillovers and international environmental externalities - both are empirically significant. Starting from noncooperation we investigate the effects of environmental cooperation, knowledge cooperation and full cooperation. We argue that because of international patent markets, knowledge spillovers are already internalized to a huge extent. For the output-induced pollution specification we found that the existence of international patent markets is partly responsible for the present environmental degradation. Therefore it is uncertain whether the creation of patent markets in the past - though stimulating growth - increased welfare. However, for the capital-induced pollution specification, internalizing the knowledge spillovers goes hand in hand with a better environmental quality.