1 Global Environmental Standards with Heterogeneous Polluters

Abstract: This paper introduces environmental quality standards into a model of intra-industry trade with heterogeneous polluters. Pollution in our model stems from consumption and pollution intensity declines with product-specific environmental quality. We formally analyze the effects of environmental standards and trade liberalization on intra-industry trade patterns, pollution, and welfare. Trade liberalization takes the form of lower per-unit trade costs, lower fixed foreign-market entry costs, or greater number of trading partners. When consumer preferences for environmental quality are weak (strong) relative to the environmental quality elasticity of production costs, firms discovering dirtier (cleaner) products are more profitable and engage in exporting. More stringent environmental standards or trade liberalization policies enhance per-capita real consumption. However, these policies have ambiguous effects on global pollution and thus welfare. The latter is defined as the difference between per-capita real consumption and global pollution. JEL Classification: Q48, Q53 and L9