Every few months, world leaders gather under the banners of global cooperation, hoping to find collective solutions to collective problems. The underlying belief is that working together makes everyone better off. But what if that is not always true? A study from the Delhi School of Economics suggests that some forms of environmental cooperation can actually make pollution worse.
In their 2025 paper, “Environmental Taxation and Trade Policy: The Role of International Coordination in the Presence of Local Pollutants”, published in Environmental and Resource Economics, Madhuri H Shastry and Uday Bhanu Sinha examine what happens when countries that trade with each other coordinate their environmental policies to tackle purely local pollution.
Their model involves three countries—two exporters and one importer. The exporters produce a single good that creates local pollution where it is made. The importer buys the good without suffering any environmental harm. Each exporting government can impose an emission tax to limit pollution or offer export subsidies to keep its industries competitive. The question the authors ask is what happens when these two governments try to cooperate.
31 October 2025
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If the countries cooperate broadly to improve their combined welfare, pollution falls and both sides are better off. But if they cooperate narrowly, focusing only on cutting emissions, the outcome flips where taxes fall, production rises and total pollution increases.
When Cooperation Backfires
Shastry and Sinha start with a situation in which both producer countries act alone. Each sets its environmental tax at a level that protects domestic welfare without hurting its exporters too much. Because the pollution is local, neither cares about what happens across the border. The result is a "not in my backyard" (Nimby) outcome—each country tries to keep its own backyard clean by taxing pollution enough to discourage excessive emissions.
When the countries decide to cooperate on overall welfare, each begins to care not just about its own firms and environment but also, to a small degree, about its rival’s welfare. This softens trade competition. They impose higher emission taxes, which reduces output and pollution. Profits rise because both firms behave less aggressively in export markets.
Now comes the twist. Assume the countries sign an agreement to cooperate only on reducing environmental damage. One might expect them to become greener and impose tougher taxes. Instead, they do the opposite. Each government realises that if it lowers its emission tax, its industries will produce more and those in the rival country will produce less.
Since pollution is local, this looks like a good deal where domestic emissions rise, but foreign emissions fall. However, when both countries think this way, both reduce their taxes. Production surges on both sides and overall pollution is higher than before.
The Economics of Green
The authors extend their analysis to include trade policy alongside environmental taxes. In the real world, governments rarely rely on one policy instrument at a time. The study captures this complexity.
When the two countries act independently, they tend to do what many governments already do in practice, that is, provide export subsidies to keep producers competitive while taxing emissions to offset some of the damage. This mix of policies leads to moderate welfare and moderate pollution.
If the countries cooperate broadly to improve their combined welfare, which includes profits, taxes and environmental well-being, pollution falls and both sides are better off
But when the governments coordinate on overall welfare, both subsidies and taxes fall. In some cases, subsidies even turn into export taxes, meaning governments deliberately restrain production. This leads to cleaner outcomes and higher welfare for the producer countries, though consumers in the importing country pay slightly higher prices.
Under narrow environmental coordination, the same policies have perverse results. The higher subsidies stimulate production, while the higher taxes fail to offset the increase in output. Pollution worsens again.
At the global level, the study finds a tension between the welfare of exporting countries and that of global consumers. When exporters coordinate on welfare, they reduce production, which hurts consumers in the importing country through higher prices. Conversely, when they coordinate only on reducing pollution, production increases and consumers elsewhere benefit, even as local environments degrade. What is good for exporters is not always good for the world.
Lessons for the World
The implications of the study reach far beyond theory. Most of the world’s environmental challenges are managed through what the authors call “narrow cooperation”. Treaties such as the Minamata Convention on mercury or the London Convention on marine dumping target specific pollutants rather than broader welfare goals. These focused agreements may seem pragmatic, but Shastry and Sinha show how they can lead to unintended consequences when countries adjust economic behaviour around them.
Their findings also mirror real-world policy contradictions. China, for instance, subsidises its manufacturing industries while taxing major pollutants. The United States promotes exports through various federal programmes even as it imposes environmental levies on methane emissions. The combination of incentives and penalties reflects the same balancing act that the authors model, a struggle to grow economically while staying green.
Shastry and Sinha’s study serves as a warning to policymakers. Good intentions are not enough. Environmental agreements that ignore trade incentives or focus too narrowly on single pollutants may end up worsening the very problems they aim to solve. The authors’ conclusion is both simple and profound. In a world of intertwined economies, countries should not merely ask how much to cut pollution, but how to grow cleanly together.
