The Long-Run Effects of Environmental Reform in Open Economies

We compare the effects of environmental reform and harmonization in the short and the long run, under autarky and free trade. With trade, harmonization of policies, even if achieved by lowering standards in one country, can improve short run aggregate welfare and increase the likelihood of reaching a good long run equilibrium. However, long run considerations favor a "race to the top" rather than a "race to the bottom". Under autarky, unilateral reform may have no short run effect; it may have no qualitative long run effect if the environment regenerates slowly. Trade increases the likelihood that coordinated environmental reform can improve welfare