The Long-Run Effects of Environmental Reform in Open Economies

Larry S. Karp, Jinhua Zhao, Sandeep Sacheti, Larry S. Karp, Jinhua Zhao & Sandeep Sacheti
We compare the short-run and long-run effects of environmental reform and harmonization under autarky and free trade. When trade is driven by environmental distortions rather than real relative advantages, harmonization of environmental policies, even if achieved by lowering standards in one country, can improve short-run aggregate welfare. With the possibility of multiple steady states, long-run considerations favor a "race to the top" rather than a "race to the bottom" even when upward and downward harmonizations...
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