Harmonizing tailpipe policy in symmetric countries: Improve the environment, improve welfare?

We show that harmonizing emissions policy may be bad for the environment and/or global welfare, even when pollution is transboundary and countries are identical in every way. Harmonization effectively internalizes the transboundary aspects of pollution. But it also changes the politics surrounding tailpipe regulation. With harmonization, producers can no longer avoid strict local regulation by simply exporting their products to overseas markets with weak standards for consumer goods. As a result, harmonization may raise political opposition to regulation. To examine these competing effects we develop a generic treatment of the politics of environmental regulation, a treatment we show to be isomorphic to three popular models of political economy: majority rules, a political elite and a political contributions approach. We find that harmonization both weakens environmental regulation and reduces global welfare when the level of political capture by dirty industry is high relative to the rate of pollution transmission across borders.