Strategic Environmental Policy, International Trade and Self-enforcing Agreements: The Role of Consumers' Taste for Variety

We study the co-ordination of environmental policy within an agreement in the context of international trade. In an n-country intra-industry trade model, firms produce a horizontally differentiated good and consumers have a taste for variety. Governments choose strategically an emission tax and their membership in an international agreement. We show that only a strong taste for variety reduces the competition among governments sufficiently enough to allow for some form of policy coordination, though full cooperation will never be obtained.