Non-transboundary pollution and the efficiency of international environmental co-operation

Abstract

The standard view is that situations where no transborder environmental externalities occur are most efficiently dealt with by national environmental policies rather than by international co-operation. Though this may be the general case, non-coordinated national policies do not always produce the most efficient international allocation. This paper presents four cases in which the allocative outcome of non-coordinated domestic policy choices can be improved upon by international environmental co-operation. The first case refers to the use of environmental policy as a strategic trade instrument. The other cases refer to the existence of discrete technologies, set-up costs and increasing returns to scale. The form of international environmental co-operation should be adapted to the situation. Formal international agreements between countries are characterised by high transaction costs and may not always be the most efficient form of co-operation.