Harmonizing Emissions Policy in Symmetric Countries: Improve the Environment, Improve Welfare?

We show that harmonizing emissions policy may be bad for the environment and/or global welfare, even when pollution is transboundary and countries are identical in every way. Harmonization effectively internalizes the transboundary aspects of pollution. But it also hampers producers’ ability to avoid local tailpipe regulation via exports of dirty goods and thereby redistributes incidence between producers and consumers. We develop a generic treatment of the political economy of environmental regulation to examine these competing effects. We find that whether harmonization makes politically motivated governments prefer stricter or weaker policy depends on their constituents’ vested interests and the degree of transboundary pollution transmission.