Trade and environmental policies

Regarding international economic efforts to maintain climatic stability, many assume that various countries' environmental policies are substitutable or independent. Yet, with the world becoming increasingly interconnected economically, this assumption may prove incorrect.

The EU-funded project INTCOP21 investigated the connection between environmental regulation and innovation in an international context. Specifically, the team examined how the presence of two externalities, the one associated with the environmental and the one associated with innovations might affect participation in international environmental agreements as well as the environmental impact of the cooperation. Also of interest were the conditions affecting emergence of a group to lead emissions reduction. The two-year project utilised a combination of theoretical systems, including game theory, coalition formation theory and others relating to international trade. The study wound up in late 2013.

Partners first dealt with the evolution of the greenhouse consequences given each type of national behaviour resulting from global economic interconnectivity. Assuming strong interdependencies, the researchers showed the potential consequences of free trade arrangements on the environment, while questioning whether trade liberalisation necessarily increases countries' welfare. The project's paper on this topic illustrated that key economic assumptions affecting the environment have not been previously considered.

A further question was how R&D investment and technology diffusion affected incentives to enact stronger greenhouse policies. Initial results showed that a country's dependence on absorptive capacity on its own R&D raises the effectiveness of that R&D. Yet, the condition also lowers effective spillovers, reducing the disincentive to invest in R&D. Generally, if emissions strategies are substitutable, increase in one country's R&D expenditure can lead to decrease in another's emission levels.

The team experimentally tested this predictions by means of a 'threshold public goods' game experiment involving small groups of individuals. Findings suggest that cooperation on innovation might promote group-wide cooperation, but assumptions about appropriability of innovation are key to understand implications for non-participants to the agreement.

INTCOP21 examined the connection between international trade and the effectiveness of environmental policies. In particular, the group studied the dynamics of R&D investment in terms of emissions levels.