Environmental Economics and Policy Studies

, Volume 18, Issue 4, pp 499–526 | Cite as

Liberalizing trade in environmental goods and services

  • Bouwe R. Dijkstra
  • Anuj J. Mathew
Research Article


We examine the effects of trade liberalization in environmental goods in a model with one domestic downstream polluting firm and two upstream firms (one domestic, one foreign). The upstream firms offer their technologies to the downstream firm at a flat fee. The domestic government sets the emission tax rate after the outcome of R&D is known. The effect of liberalization on the domestic upstream firm’s R&D incentive is ambiguous. Liberalization usually results in cleaner production, which allows the country to reach higher welfare. However, this increase in welfare is typically achieved at the expense of the environment (a backfire effect).


Eco-industry R&D Trade and environment Trade liberalization Backfire effect 

JEL Classification

F12 F18 L24 O32 Q55 Q58 



We thank Rod Falvey, Arijit Mukherjee, Joanna Poyago-Theotoky, the anonymous referee and seminar attendants at ZEW Mannheim and the Universities of Strathclyde (Glasgow) and Tor Vergata (Rome) for valuable comments. Any remaining errors are our own. The views expressed in this paper do not reflect the views of NOMS, the Ministry of Justice or Her Majesty’s Government.


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Copyright information

© Society for Environmental Economics and Policy Studies and Springer Japan 2015

Authors and Affiliations

  1. 1.GEP and School of EconomicsUniversity of NottinghamNottinghamUK
  2. 2.Government Economic Service (UK), National Offender Management Services (NOMS)Ministry of JusticeLondonUK
  3. 3.CESifoMunichGermany

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