Steve DeLoach, associate professor of economics, recently made a presentation at the annual conference of the Western Economics Association International, July 4-8 in San Francisco. The paper, “Strategic Environmental Policy with Technology Licensing” is co-authored by Tina Das, associate professor of economics.
The paper investigates whether linking cooperation on environmental policy with licensing of pollution abatement technology can increase the likelihood that countries will choose to enforce international environmental agreements.
In theory, it is easy to understand the difficulty in forging bilateral agreements where both signatories fully protect the environment. The reason is that governments have an incentive to cheat on agreements in an effort to provide their firms with a competitive advantage in international trade. The existence of these incentives creates the possibility of a “race to the bottom” whereby countries continually lower their environmental standards to compete in the global marketplace.
Using non-cooperative game theory, DeLoach and Das show that allowing for licensing of pollution abatement technology can help stabilize international environmental agreements; but only under certain conditions. Most interestingly, the more technologically-advanced of the two countries must be willing to forgo protection the environment if the agreement is not mutually enforced. Such “race to the bottom” threats are simply not credible if the technologically-superior country is significantly more efficient than its rival.
The implication is that it is highly unlikely that countries like the United States would be able to encourage trading partners like China and Mexico to increase their environmental protection simply by offering to sell them their pollution abatement technology. In other words, for international environmental agreements to work, potential signatories cannot be too dissimilar in their technological capabilities.