Can policies backfire? The impact of uncoordinated domestic policies on global pollution

In this paper, we take into account that different types of pollutants (both local pollutants like SPM and global pollutants like CO2) are generated during a production process. We consider a two-country framework with one firm in each country and strategic interaction between them A dirty good beings produced by both the firms generates both local and global pollutants during production. The dirty good is a quality-differentiated product with the quality being determined by the cleanliness of the good, which in turn depends on the abatement technology used. We analyse the impact of an environmental standard imposed by one country to curb local pollution there. We show that such unilateral policy adopted by the high-quality country aimed at lowering domestic pollution may not be a step in the right direction as they may raise global pollution. However, in the presence of consumer awareness regarding global pollution, a standard imposed by the high-quality country will lower global pollution while one imposed by the low-quality country may raise it if awareness is too low. thus creating awareness about global pollution should be undertaken before adopting any policy.