It is sometimes argued that globalisation undermines environmental policy because countries are tempted to use lax environmental standards to make domestic industries more competitive on world markets. Since each country tries to be competitive on world markets, environmental policy may suffer from a ‘race towards the bottom’. To avoid such developments it is frequently suggested to harmonise environmental standards or to introduce trade measures against ‘dirty’ goods from abroad in order to level the playing-field. Such suggestions rather contradict most trade and environmental economic theory. According to economic theory, environmental policy — in a world of perfect competition — should be determined by the country-specific endowments with environmental resources and not by internationally uniform standards. Factors influencing the endowments are physical and geographical conditions but also the willingness of the people to pay for environmental quality. Since these conditions can be different across countries, uniform environmental standards and/or trade measures are likely to be inefficient (see Bhagwati and Srinivasan, 1996, for instance). Consequently, trade policy should be rather independent from environmental policy.
KeywordsEnvironmental Policy Price Elasticity Energy Price Final Good Energy Market
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