Global environmental standards with heterogeneous polluters

- We propose a simple model featuring intra-industry trade, heterogeneous firms, and consumption-generated pollution.
- Firms discovering dirtier products make more profits and export with weak consumer preferences for environmental quality.
- Firms discovering cleaner products make more profits and export with strong consumer preferences for environmental quality.
- A more stringent global environmental standard has an ambiguous effect on global pollution and welfare.

We introduce environmental quality standards into a model of intra-industry trade with heterogeneous polluters. Pollution stems from consumption and pollution intensity declines with product-specific environmental quality. We formally analyze the effects of global environmental standards and three trade-liberalization policies. When consumer preferences for environmental quality are weak (strong) relative to the environmental quality elasticity of production costs, firms discovering dirtier (cleaner) products are more profitable and engage in exporting. More stringent environmental standards or trade liberalization policies enhance per-capita real consumption. The effects of these policies on global pollution and welfare are ambiguous.