Abstract
Pollution leakage is an important issue when countries address international environmental problems unilaterally. Leakage in this context is the increase in foreign emissions after a reduction in domestic emissions which results from international market interdependencies. In this paper,1 consider two markets,the first one for a polluting input (e.g. energy) and the second one for internationally mobile capital. Leakage is decomposed into its two components and the magnitudes of the effects are determined for a calibrated version of the model. Towards the end of the paper,normative questions related to the optimality of environmental policies are addressed. KeywordsInternational trade and the environmentforeign direct investmentpollution leakage
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