Do voluntary international environmental agreements work? Espen Bratberg*, Sigve Tjøtta*, and Torgeir Øines**

Transcription

1 Ths verson: 23-May-03 Do voluntary nternatonal envronmental agreements work? by Espen Bratberg*, Sgve Tjøtta*, and Torger Ønes** Keywords: Internatonal envronmental cooperaton, program evaluaton, and mcro econometrcs. Fnancal support from Forsknngsfondet and SAMSTEMT, Norwegan Research Councl * Department of Economcs, Unversty of Bergen ** Høgskolen Bodø. 0

2 Abstract: We consder the effect of nternatonal envronmental agreements, usng the Sofa protocol on reducton of ntrogenc oxdes. Our analyss utlse panel data from 25 European countres n the perod We dvde these countres nto partcpants countres that ratfed the Sofa-protocol and non-partcpants whch dd not ratfed the protocol. Usng a dfference n dfference estmator, we fnd that sgnng the treaty has a sgnfcant postve mpact on emsson reducton. The yearly reducton s approxmately 2.4 percent larger than t would have been wthout the Sofa-protocol. 1

3 1 Introducton Rsng numbers of nternatonal envronmental agreements (IEA) are often seen as strong evdences that these voluntary agreements are successful. By 1994 Barrett (1994, p 878) reports more than 100 IEAs currently n force. Most agree that envronmental problems such as global warmng and acdfcaton crossng country borders needs some form of nternatonal cooperaton. Wthout cooperaton each country has an ncentve to free rde on emsson reductons from other countres, and as a whole the countres end up n a prsonersdlemma stuaton. However, sgnng IEAs need not nfer success and realzaton of cooperatve gans. To evaluate an agreement t s mportant to address the queston: Does an agreement have an effect on sgnng countres polluton polces? Thus, we consder an IEA to be successful f the sgnng countres reduce ther emssons more then they would have done wthout the agreement. Clearly, the answers to these questons are mportant n whch drecton we shall go to solve our common problems. The bulk of the economcs lterature on success of IEA can be summarzed as they tend to codfy Nash behavour and, as such do not present much of a cooperatve gans, Arce and Sandler (2001, p 494). Ths concluson s supported by Murdoch et al (1997a) who emprcally evaluated both the Helsnk Protocol on the reducton of sulfur n Europe and Sofa Protocol on reducton of ntrogen oxdes by estmatng emsson reductons from 1980 to 1990 for 25 European countres. Murdoch et al (1997b) analyse the Montreal Protocol on the reducton of CFCs and ther emprcally results show that agreed emsson celngs under ths agreements s more n lne wth non-cooperatve Nash than wth cooperatve behavour of governments. Ths vew s further supported by smulaton studes of IEAs: The Helsnk Protocol on reducton of sulfur (Maler (1990)), the Oslo Protocol on further sulfur reductons, (Fnus and Tjøtta (2003)), and the Montreal Protocol on lmts to the emsson of ozone-depletng 2

4 substances of 1997 (Barett (2001). 1 Fnally, most of the theoretcal lterature on cooperaton n nternatonal envronmental agreement predcts that cooperaton s rather lmted. Barrett (1994) explores a self-enforcng IEA wthn a two-perod model. In the frst perod countres decde to partcpate or not, and n the second perod the countres partcpators and nonpartcpators determned ther emsson levels non-cooperatvely. Ths model predcts that the numbers of partcpator countres are lmted, and that self-enforcng nternatonal agreements may not be able to mprove substantally upon the non-cooperatve outcome. Results from smlar models by Carro and Snscalco (1993) and Hoel (1992) also predct that cooperaton s relatvely lmted. Lange and Vogt (2003) explan the large number of observed nternatonal cooperaton that they are drven by equty prncpal n the sense of n addton to self nterest. To sum up; accordng to these arguments n the economc lterature, the predcton s that partcpatng n nternatonal agreements nether changes countres polluton polces nor realzes effcency gans by cooperaton. In ths paper we take another approach to assessng the potental of IEAs. We consder the Sofa Protocol for reducng oxdes sgned n In a typcal agreement, as the Sofa Protocol, sgnatory countres agree to stablse or reduce emssons of a specfc pollutant. We focus on emsson reductons, and n partcular on the queston: Do sgnatory countres reduce ther respectve emssons more than they would have done wthout the agreement? The man obstacle to provde an answer s the lack of a counterfactual: We do not know what emssons would have emerged wthout the agreement. Our approach s to follow the evaluaton lterature and argue that under certan condtons, non-sgnng countres consttute a relevant comparson group. 1 The protocols are: The Protocol on the Reducton of Sulfur Emssons and ther Fluxes at least by 30 Percent sgned n Helsnk n 1985, The Protocol for further Reducton of Sulfur Emssons sgned n Oslo 1994, and The Montreal Protocol on Substances That Deplete the Ozone Layer sgned n Montreal n

5 The Sofa-protocol, The Protocol concernng the Control of Emssons of Ntrogen Oxdes or ther Transboundary Fluxes, was sgned n Sofa on 1 November 1988 and requres the partes of the agreement to freeze ther emssons of ntrogen oxdes on 1987 level before As comparson group we use countres that had ratfed the LRTAP-conventon, Framework Conventon on Long-range Transboundary Ar Polluton of 1979 but dd not sgn the Sofa protocol. These countres were nvted to jon negotatons and sgn the Sofa protocol. The rest of the paper s organsed as follows: In secton 2 we gve hstorcal background for the Sofa Protocol. Secton 3 outlnes a theoretcal model for emsson of a pollutant from a country. Secton 4 presents the econometrc model, emphassng program evaluaton prncples. Secton 5 contans at descrpton of the data, and n secton 5 we present our man results. Secton 6 concludes. 2 Hstorcal Background for the Sofa Protocol The damagng effects of acdfcaton n Europe were dscovered n the 1950s and 1960s n fsh stocks n Scandnava, and snce then the stuaton has deterorated. In southern Norway, for example, fsh populatons have sustaned extensve damage or even dsappeared over an area of about square klometres. The affected area has roughly doubled n sze snce The process of acdfcaton also results n the ncreased presence of alumnum and other toxc metals n the ground water, and these effects are consdered to be among the causes of forest declne n Europe. Ntrogen oxdes and ther transboundary fluxes also cause serously health threat to vulnerable persons by reducng ar qualty. For many European countres, ntrogen oxdes deposton s brought about by wnds blowng t n from other countres. The deposts ether falls to earth or combnes wth water vapour whch s later depost as ran or snow. These ar pollutants can be carred by wnds for 4

6 hundreds and even thousands of klometres before beng deposted n sol or water. The deposton process s clearly rvalry snce one ton of deposton n one country cannot be deposted n another country. The ar qualty and transboundary fluxes, however, are not rvalres snce the same arborne partcle nfluence dfferent persons at health rsk, nsde one country and n dfferent countres. Clearly, ntrogen oxdes emssons create externaltes across countres. Emsson decsons n one country has envronmental and health consequences n other countres. Wthout any (market) mechansm to adjust for these externaltes ths wll lead to an neffcent resource allocaton. These transboundary aspects of ntrogen emssons as well as other envronmental problems call for some form of cooperaton between countres. The Stockholm Conference of 1972 made decsons to establsh the Unted Natons Envronmental Programme (UNEP) to adopt recommendaton on nternatonal cooperaton n a broad range of envronmental problems. One of the frst agreements n ths program was the Framework Conventon on Long-range Transboundary Ar Polluton (LRTAP) of The LRTAP conventon consttutes a declaraton of good wll and served as a framework for follow-up protocols. In 1984, 22 countres sgned the montorng and evaluaton protocol, The Cooperatve Programme for Montorng and Evaluaton of Long-Range Transmsson of Ar Polluton n Europe (EMEP). Ths protocol requres that sgnatores report on ther emsson to the treaty secretarat. Subsequently protocols followed, regulatng specfc pollutants that cause acdfcaton. The Helsnk Protocol of 1985 and the Sofa-protocol of 1988, whch s the object of ths study, were among the frst of tll now (2001) nne protocols succeedng the LRTAP conventon. The Protocol requres the partes of the agreement to freeze ther emssons of ntrogen oxdes or ther transboundary fluxes at 1987 level before As most of the envronmental 2 and ts follow-up protocols. 5

7 agreements the Sofa Protocol s a voluntarly agreement where no economc transfers and compensatons are explctly stated n the protocol texts; hence there are no explct sancton possbltes. In case of dsagreement between partes, then accordng to Artcle 12 n the Protocol ()f a dspute arses between two or more Partes as to the nterpretaton or applcaton of the present Protocol, they shall seek a soluton by negotaton or by any other method of dspute settlement acceptable to the partes to the dspute. One mportant excepton explctly compensaton s the Montreal Protocol where sde payment was a part of the Protocol. Accordng to the Protocol homepage the partes of the protocol n 1994, or a prevous year where no recent data are avalable, had reduced ther total emsson by 9% compared to reference year (1987 for all except Unted States 1978) 3. Furthermore, 19 of the 25 partes of the Protocol have reached the target or reduced emssons below that level. 3 Model for emsson from a country To conserve notaton we drop tme subscrpts n descrbng a model for emsson of a pollutant n a country wth N ndvduals. The envronmental qualty Q n country depends on own emsson E as well emssons { E } from other countres j. j j We defne the coeffcentα as the proporton of total emssons released by emtter j, whch j s deposted at receptor. The α parameters capture external aspects of arborne polluton such as ntrogen oxdes as one ton depost at receptor j cannot be depost at other receptors. In addton these coeffcents capture publc bad aspects of arborne polluton as the same ton of a pollutant may be aloft over other countres, and hence puttng dfferent persons at rsk of 3 See 6

8 health. We use total depost of the pollutant as proxy for the total consequence on the envronmental qualty n country ; Q = Q α E + α E ) (1) ( j j j The coeffcentsα reflect annual wnd pattern, meteorologcal condtons and geographcal dstrbuton of sources of pollutant. j We defne emssons n a country as polluton less abatement. The pollutant s a byproduct n the producton of a prvate consumer good, and we let c denote the average consumpton of the prvate good. Resources avalable for abatement are naton s ncome I (gross natonal ncome) less total consumpton N c. Emssons are then E = P N c ) A ( I N c ) (2) ( where we assume P ' (.) > 0, P '' (.) < 0, and A ' (.) > 0. The abatement technology s charactersed by decreasng (ncreasng) returns to scale f A '' (.) > 0 ( A '' (.) < 0). Substtutng (2) nto equaton (1) we defne the technologcal and ecologcal set condtonal on exogenous varables ncome I, populaton and share of deposton of domestc emsson α N the emssons E j from the other countres, Γ ( c, Q ) = 0 (3) 7

9 Fnally, we assume that the decson process nsde the country leads to a Pareto effcent allocaton of resources. We assume that that a representatve ndvdual obtan utlty from consumpton of the prvate good c and envronmental qualty Q whch we assume s a pure domestc publc good. The effcent allocaton of prvate consumpton and envronmental qualty s charactersed by maxmsng the representatve utlty u = u c, Q ) (4) ( gven the condtonal set (3). A necessary condton for effcency s the famlar Samuelson rule for provson of publc good; the sum of margnal wllngness to pay across ndvdual equals margnal cost of provdng envronmental qualty, N MRS = MRT. Ths condton defnes the effcent cq cq prvate consumpton and envronmental qualty, and substtutng the effcent allocaton nto (2) gves us emssons as a functon of the exogenous varables I, N, a lnear approxmaton of ths emsson functon; E j, andα. We assume E = θ + θ1i + θ 2N + θ3α + θ 4( α je j ) (5) 0 j where the θ ' parameters summarze our predcton of how emsson vares across country and tme. The mpact of ncome on emsson s ambguous f both prvate consumpton and envronmental qualty are normal goods; for mathematcal detals see the appendx. Increased prvate consumpton wll nduce ncreasng polluton from producton of the prvate good. On the other hand, an ncrease n ncome wll nduce hgher demand for envronmental qualty 8

10 and some of the ncome ncrease wll be used for abatement. Clearly, the net mpact of ncome on emsson s postve f the frst effect domnates, otherwse t s negatve. Increasng returns to scale n the abatement technology wll strengthen the negatve effect. The effect of an ncrease n populaton, N, on emsson s also ambguous. On one hand, an ncrease n populaton ncreases the total consumpton gven the average consumpton s constant and therefore both ncrease the polluton generatng producton of the prvate good and reduce resources use for abatement. Both effects wll ncrease domestc emsson. On the other hand, ncreased populaton reduces the average consumpton and reduce emsson. Fnally, ncreased emssons from other countres j or ncrease n one of parametersα, reduce emsson n country as long prvate consumpton and envronmental qualty are substtutes. Emprcal evdence suggests that for some pollutants emsson per capta and average ncomes per capta follow an nverted U-shaped pattern. Ths relatonshp s called an envronmental Kuznets curve due to Kuznets (1955), who found evdence that nequalty follows an nverted U-shaped form of per capta ncome over tme. Both World Bank (1992) and Grossman and Krueger (1995) fnd emprcal evdence for envronmental Kuznets curves for some pollutants, whereas Harbaugh et.al. (2001) fnd lttle support usng an updated and revsed verson of the data set used by Grossman and Krueger. 4 To capture the possblty of an envronmental Kuznets curve we nclude a quadratc term n ncome. 4 Evaluatng the agreement effect The purpose of the emprcal part of the paper s to assess the effect of the Sofa protocol on NOX emssons. We am to accomplsh that goal usng methods from the mcroeconometrc 4 One explanaton for the nverted U-shaped curve s that ths reflects the natural progresson of economc development from clean agrcultural economcs to polluton ndustral economes to clean servce economy, Arrow et al (1995). A second explanaton s that envronmental qualty s an nferor good for low ncome and a 9

11 program evaluaton lterature. 5 Let 1 Et denote country s emssons n year t (measured n logs) f t has sgned the treaty, and let 0 Et denote ts emssons f t has not. The parameter of 1 0 nterest s = ξ ( E ), where ξ s the expectaton operator. Clearly ths entty may not be t E t observed drectly, as the same country cannot be observed as havng sgned the treaty and not havng sgned t n the same perod. It s therefore necessary to use non-sgnng countres to observe the behavour of sgnng countres. Rewrte the lnearzed emsson equaton from the prevous secton for a country that has not sgned as 0 0 E = θ + θ ' X + U, (6) t 0 t t where we have gathered the rght-hand sde varables n the vector X, θ s the accordng coeffcent sector, and θ 0 s the ntercept. U s a random varable wth zero expectaton that pcks up the effect of unobserved factors. Assume that the accordng equaton for a country that has sgned the treaty s E = γ + θ + θ ' X + U. (7) 1 t 0 t 1 t In other words, we assume that the effect of observable varables (θ) s the same for sgnng and non-sgnng countres, but the effect on unobservable varables s not (necessarly), and that the effect of sgnng the treaty s pcked up by γ. Let D t = 1 f country has sgned n perod t, 0 otherwse. Just subtractng the average of equaton (6) from the average of equaton (7) wth perod t data yelds a based estmator normal good for hgh ncome. A thrd theoretcally explanaton s economes of scale n abatement technologes; see Andreon and Levnson (2001). 5 See, e.g., Mofftt (1991) for a smple exposton of the most commonly appled methods, or Heckman et al. (1999) for a comprehensve overvew. 10

12 1 0 unless ξ ( U D 1) = ξ ( U D = 0) ; ths s the well-known selecton bas problem. Wth t t = t t panel data avalable, however, we may use the dfference n dfferences estmator, ˆ 0 t, t 1 t t, t = ξ ( E E D = 1) ξ ( E E D = 0). (8) t To evaluate (8) we need data on countres that had sgned n t but not n t 1. Usng (6) and ˆ 0 t, t 1 t t, t (7) to rewrte (8) as = γ + ξ ( U U D = 1) ξ ( U U D = 0), we see that the necessary assumpton for unbasedness s t ξ ( U U D = 1) = ξ ( U U D = 0). (9) t, t 1 t t, t 1 t Note that equaton (9) s equvalent to ξ ( E E D = 1) = ξ ( E E D = 0). (10) t, t 1 t t, t 1 t In other words, the dentfyng assumpton s that n absence of the agreement, the change over tme for countres that sgned the treaty and countres that dd not, would be the same. To obtan the dfference n dfferences estmator, we run the regresson E t E, t 1 = θ 1 + γ ( Dt D, t 1) + θ ' ( X t X, t 1) + ε t. (11) 11

13 The constant term allows a common trend. To dentfy the effect, t s necessary to have at least one pre- and post-agreement observaton for countres that sgned and countres that dd not. An addtonal econometrc problem s posed by the spatal nature of the data. Rewrte the lnearzed emsson equaton as ~ E θ + U, (12) t = 0 + θwwt + θ3α, t + θ 4E, t t where ~ E, t = j α j, t E jt, and the vector W contans varables other than emssons and transport coeffcents. It s clear that the varable ~ (country s mported emssons) s E, t correlated wth U t. Consder some country k : E t, and thus U t, s ncluded n ~ and thus E k, t n E kt. Therefore, ~ s correlated wth U t and the standard OLS assumptons are volated. E, t In prevous contrbutons based on cross-secton data, e.g. Murdoch et al. (1997, 2003) the problem has been addressed by applyng spatal autoregresson methods (Anseln (1988)). Here, however, we use panel data and thus are able to use lagged values varables as nstruments, assumng that the errors are not serally correlated. 6 5 Data and varables Our analyss utlses data from 25 European countres n the perod As noted the Sofa protocol s one of nne (current) follow-up protocols of the LRTAP-conventon sgned n Geneva n All our 25 countres have sgned and ratfed the Geneva Conventon. The Sofa protocol was sgned 1 November 1988 and entered nto force 25 November For 6 As the model s estmated n frst dfferences, the nstruments are lagged twce. 7 Accordng to Artcle 15 the protocol enter nto force 9 days after the sxteenth country ratfes. 12

14 countres ratfyng at a later date the protocol enter nto to force nne day after ther respectve ratfcaton date (Artcle 15 part 2). We classfy countres as partcpants f they ratfed the Sofa-protocol by the end of 1994 and non-partcpants f they dd not, respectvely 18 and 7 countres. Greece (1998) and Belgum (2000) have ratfed the protocol, but snce ther ratfcaton came after the tme of the agreement goal, we classfy them as non-partcpants. 8 (Table 1 about here) As mentoned above the Sofa Protocol was sgned at 1 November 1988, and snce we only have annual data we use 1989 as the sgnng year. If we assume that countres ratonally expected that they wll ratfy the protocol at a later date, the sgnng year 1989 seems as natural choce of treatment year. An alternatve arrangng of the data s to use the year of enterng nto force as the treatment year. For most of the countres ths s 1991 (13 countres), and for rest of partcpants later years, but before 1994; see Table 1. To check robustness of our result we run regressons wth the treatment years as the enterng nto force years, and pre and post sgnng years (1988 and 1990). 9 Qualtatvely the results reman the same, however. The poltcal geography of Europe has changed snce the LRTAP- conventon was sgned n Some countres have been splt up and two German states have been unfed to one country. Due to data lmtatons both before and after poltcal changes, we treat the Czech Republc and Slovaka and as one unt, and the same apples to the former Sovet Unon states 10. Furthermore, Germany s treated as one unt durng the whole perod, snce there s no separate data for East- and West Germany after the reunon. The Former Republc of Yugoslava s left out of our analyss snce data s poor. 8 Lechtensten s excluded due to lack of data. 9 As ratfcaton year we use ratfcaton date adjusted to the closest year. 10 We only have data for Belarus, Ukrane, Russan Federaton, Lthuana and Moldova. 13

15 Data on NO x -emssons are taken from table 2 n EMEPs homepage 11. We use the source-receptor matrx n EMEP (1997) to derve mport of NOX-depost and share of a country s NOX-emsson depost n the specfc country s own geographcal area ( α ). As a part of the EMEP protocol, transportaton matrxes between partes for dfferent pollutants such as ntrogen oxdes and sulfur are calculated. The GDP-data are based on UN Statstcal Yearbook 1993 and To secure consstency n the entre tme seres, we compare 1987-observatons for each country n the two edtons. If the devatons are substantal, we use growth rates n the 1993-edton to calculate GDP-numbers for usng the fgure for 1987 n the 1995-edton as a startng pont. Populaton data s from UN Statstcal Yearbook 1995 as well, usng GDP and GDP per capta to calculate the sze of the populaton. Summary statstcs n Table 1 reveals notceable dfferences between partcpator and non-partcpator countres. For the Sofa-protocol, the partcpant countres have more then double GDP per capta then non-partcpator countres. Furthermore, the partcpator countres have more NOX-emsson, and average NOX-emsson per capta s hgher than for nonpartcpator countres. However, NOX emsson per GDP for partcpators s consderable lower. Ths ndcates a more ntensve use of NOX n ndustry n non-partcpator then n partcpator countres. (Table 1 about here) The poltcal changes n Europe mght have an effect of the emsson behavour. We therefore nclude a control dummy varable for the former communst countres of Eastern Europe reflectng the transton process. We use 1991 as the transton year, ndcatng posttranston wth a dummy. Senstvty analyss of the transton year (1988, 1989, 1990) reveals small changes n numbers and dd not alter the results. We classfy Germany among 11 The EMEP programme (Co-operatve Programme for Montorng and Evaluaton of the Long-Range 14

16 transton countres as well, snce former East Germany s a former communst country gvng the reunted Germany the same characterstcs as other East European countres, wth relatvely a lot of pollutng, neffcency ndustry to close 12. As we can see from the summary statstc there are slghtly more transton countres among non-partcpator countres. (Fgure 1 about here) For a frst mpresson of the potental effect of the agreement, let us have an exploratve look at the data. In Fgure 1, we have normalzed NOX emssons by ndexng on 1987, the target year for emssons untl The data are sorted accordng to whether countres belong to the group of sgnng or non-sgnng countres. Lookng at the average partcpatng country, there seems to be no clear trend before 1987, f anythng the tendency s ncreasng from 1984 and decreasng from There actually seems to be a clearer downward trend from 1989, the year we defne as the agreement year. In 1994, all but three sgnng countres had emssons below the target level. The pcture for the average of the nonsgnng countres seven by our defnton s nosy, but there seems to be an ncrease untl 1987 wth no clear trend thereafter. Even so, we must note that only two of the nonpartcpatng countres for whch we have data n 1994 had not decreased emssons below 1987 level. We recall from the prevous secton that the dentfyng assumpton of the dfference n dfferences estmator s that the pre-agreement trend for sgnng and non-sgnng countres should be the same. Wth the possble excepton of , and takng nto account the small sample sze, we contend that the data do not reject that assumpton. 13 (Fgure 2 about here) The mpresson that the agreement countres perform better s supplemented by Fgure 2, whch shows NOX growth rated (change n the log of emssons). After 1990, the growth of Transmsson of Ar pollutants n Europe) montors emssons regulated by the LRTAP-conventon. The data s from Table 2 n 12 Classfyng Germany as non-transton country dd not change results. 13 Due to mssng background nformaton, the frst year used n the regressons s

17 the medan sgnng country s clearly below that of the medan non-sgnng country, but we also se an upward trend for both groups. Summng up, the message from the raw data seems to be that the agreement worked. However, the decson process modelled n secton 3 has not been taken nto account. To accomplsh that, we now turn to results from our econometrc model. 6. Results Table 3 shows results from estmatng equaton (11) wth NOX emssons n logs and explanatory varables as detaled n the prevous secton. Except for the partcpaton and transton country dummes, the ndependent varables are n logs, and ther coeffcents may be nterpreted as elastctes. OLS and IV estmates are reported. We also report results from a regresson on just the partcpaton dummy and a constant term ths s tantamount to just comparng the average outcomes, and gves an mpresson of the potental bas n the treaty effect resultng from not takng nto account the economc model. (Table 3 about here) We frst comment on the OLS results. The coeffcent on the Sgned treaty varable s sgnfcant at the.01% level n the OLS results, confrmng the mpresson from the descrptve statstcs and Fgure 1 that sgnng the treates had an effect on the partcpatng countres emssons. The estmated coeffcent of means that yearly average reductons n NOX-emssons were approxmately 2.4 % larger for partcpatng than for nonpartcpatng countres. Ths can be nterpreted as the effect of the Sofa-protocol. We also note that just comparng mean outcomes wthout controllng for country characterstcs overestmates the treaty effect by more than 40% - the coeffcent s decreased to The other way around, ncludng country characterstcs decreases the treaty effect by about 30%, 16

18 whch gves an estmate of how much of the dfference between sgnng and non-sgnng countres that s accounted for by country characterstcs. Turnng to the other results, we unexpectedly fnd that there s no sgnfcant effect of mported NOX on own emssons the negatve sgn s as expected, however. The same s the case for the part of a country s emssons that are deposted on ts own sol (α ). 14 The effect of GDP, the emprcal counterpart to ncome n the theoretcal model, s postve but decreasng (the turnng pont at log GDP=5.4 s outsde the sample). Ths s consstent wth the predcted counteractng effects of polluton ncreasng wth ncreased producton, at the same tme as ncreased ncome ncreases the demand for envronmental qualty. However, the frst effect domnates. The concave shape s also consstent wth the dea of a envronmental Kuznets curve. Populaton sze has a negatve and sgnfcant effect on emssons. Ths varable, too, has an ambguous effect n the theoretcal model. Our result ndcates that the domnatng effect of populaton s that, at a gven ncome level, t reduces average consumpton and thus the pollutng b-product of consumpton producton. Fnally, we note that the estmated for the Transton country varable means that NOX emsson reductons are approxmately 2.8 % larger n the transton economes than n other countres. Takng nto account the hgh pre-transton polluton levels n these countres, the result s reasonable and ndcates that the potentals for mprovement were larger n those economes. We noted n the prevous secton that due to the spatal nature of the data, the OLS assumpton that explanatory varables be uncorrelated to the error term s volated. However, the IV results, and n partcular the treaty effect, are qute smlar to OLS. A Hausman test does not reject OLS n favour of IV. Admttedly, our nstruments (lagged values of the rght hand sde varables) are only weakly correlated to the problematc varable, mported NOX. On the other hand, they pass the Sargan test for not beng correlated to the error term. It s 17

19 also the case that the endogenous varable comes out as nsgnfcant. That could be a consequence of the endogenety, but as noted above, we thnk t results from the frstdfference transformaton. On ths background, we beleve that the endogenety of ths varable does not serously affect the estmate of the treaty effect, whch s the focus of nterest n ths paper. How do our fndngs compare to the receved lterature? The results seem to devate from Murdoch et al. (1997a), who consder the Helsnk and Sofa protocols and fnd no effect of the latter, n the sense that the partcpaton dummy was nsgnfcant. Ther approach s dfferent from ours, however, n that they estmate a model derved from a Nash representaton on cross-sectonal data for the pre- and post-agreement perods separately. 15 Thus ther results test the relevance of ther behavoural model rather than the effect of the treaty. Ther key varable s spllns (mported NOX n our notaton), whch s nterpreted as a strategc response varable. When ths varable comes out as sgnfcant and negatve, t s nterpreted as confrmng strategc free-rdng. On the other hand, we use the tme- and crosssecton varaton n the full panel, before and after sgnng the Sofa agreement, for a drect assessment of the agreement effect. As noted above t s hard to dentfy the effect of spllns wth the panel data estmator. Our focus and emprcal approach s dfferent, therefore the results are not necessarly at odds. As a fnal caveat, t s clear that the credblty of our results hnges on the dentfyng assumpton that n absence of the treaty, the change over tme would be the same for partcpator and non-partcpator countres. The graphc nspecton of data n the prevous secton at least dd not provde evdence aganst the hypothess. It may be problematc that the 14 The statstcal nsgnfcance may be a consequence of frst-dfferencng, whch takes out much of the crosssectonal varaton n the data there s not much tme-varaton n α and α j. In a pooled OLS regresson n levels, both varables came out sgnfcant. 15 Ther outcome varables are emsson reductons and

20 sample sze s small, n partcular for the non-partcpator countres. However, that crtcsm also apples to prevous work n ths feld. 6 Conclusons We started out by askng f envronmental agreements do have effects. Regardng the Sofa protocol, our answer s yes. Analyzng annual data for ratfers of the LRTAP conventon before and after the Sofa protocol, we fnd that annual reductons n emssons were approxmately 2.4 percent larger then t would have been f the Sofa agreement had not been sgned. If one accepts the fundamental assumpton of the emprcal analyss, ths may be nterpreted as a causal effect. Ths concluson may be put n queston by a somewhat lmted data materal. Stll our conclusons bear some promse for the future of nternatonal cooperaton to control harms to the envronment. It should also be a topc for future research to apply smlar methods to assess the effects of other nternatonal agreements. 19

21 References Andreon James and Levnson Ark (2000) The smple analytcs of the envronmental Kuznets curve. Journal of Publc Economcs 80 (2001), Anseln, L (1988): Spatal Econometrcs: Methods and Models, Dordrecht, Kluwer. Barett, Scott (1994). Self-Enforcng Internatonal Envronmental Agreements. Oxford Economc Papers 46 (1994), Bolton, G.E. and A. Ockenfels (2001) ERC: A theory of equty, recprocty, and competton. The Amercan Economc Revew 90, Carraro, C and D. Snscalco (1993) Strateges for the nternatonal protecton of the envronment. Journal of Publc Economcs 52, Carraro, C. and D. Sncalco (1998) Internatonal envronmental agreements: ncentve and poltcal economy. European Economc Revew 42 (3-5), EMEP (1997): MSC-W Status Report 1/97 Part II, Meteorologcal Syntheszng Center - West, The Norwegan Meteorologcal Insttute, Oslo, Norway Fnus M. and S. Tjøtta (2003) The Oslo Agreement on Sulfur Reducton n Europe: The Great Leap Forfward? Forthcomng n Journal of Publc Ecoomcs. Førsund, F. and Nævdal, E. (1995): Tradng Sulfur Emssons n Europe, n Klassen, G. and Førsund, F. (eds): Economc Instruments for Ar Polluton Control, Kluwer Academc Publshers, Laxenburg, Austra. Erc 7/ vlle heller at v skulle referrer artkkel I JEE. Grossman, Gene M. and Alan B. Krueger (1995) Economc Growth and the Envromental. Quarterly Journal of Economcs 110 (May 1995), Harbaugh Wllam T., Levnson Ark, and Davd Molloy Wlson (2001) Reexamnng the Emprrcal Evdence for an Envromental Kuznets Curve. UNBER Workng Paper No. W7711 Hoel, Mchael (1992) Internatonal envronmental conventons. The case of unform reductons of emssons. Envronmental and Resource Economcs 2, Keohane, Robert O. (1984) Recprocty n Internatonal Relatons. Internatonal Organzaton 20(1): Kuznets, Smon (1955), Economc Growth and Income Equalty. Amercan Economc Revew 45 (Jan 1955), Mahler K. A (1990) Internatonal envronmental problems. Oxford Revew of Economc Polcy 6,

22 Murdoch, J. C. and Sandler, T. (1997a): The voluntary provson of a pure publc good: The case of reduces CFC emssons and the Montreal Protocol. Journal of Publc Economcs, vol 63 (1997) Murdoch, J. C., Sandler, T. and Sargent, K. (1997b): A Tale of Two Collectves: Sulphur versus Ntrogen Oxdes Emsson Reducton n Europe. Economca (1997)64, Lange Andreas and Carsten Vogt (2001) Cooperaton n Internatonal Envromental Negotoatons due to a Preference for Equty. ZEW Dscusson Paper No , Mannhem. Germany. Forthcomng n Journal of Publc Economcs. Pgou, A.C. (1920): The Economcs of Welfare. London, Macmllan and Company Sandler T and Hartley (2001) Economcs of Allances: The Lessons for Collectve Acton. Journal of Economc Lterature vol 39 (3) World Bank (1992) World Development Report 1992 New York, Oxford Unversty Press, 1992) 21

23 Appendx Note that f both prvate good and envronmental qualty are normal goods then dc * 0 < N dc* < di 0 < N < 1. di We fnd ncome s mpact on emsson by substtutng effcent prvate consumpton nto (2) and dfferentate wth respect to ncome; de * dc * = NP ' + A '( N di di dc * 1) di (A1) The frst term n (A1) s postve and the second s negatve. Hence, the net effect of ncome on emsson s ambguous. The effect of an ncrease n the populaton s gven by de * dc * = ( P ' + A ')( c * + N ). dn dn The drect effect the frst term n the second parenthess - of an ncrease n populaton s to ncrease producton of polluton-generatng consumpton good and to reduce abatement. The dc * ndrect effect depends on reducton of average consumpton < 0. Clearly, the net effect dn depends on the relatve magntude of the drect and ndrect effect. Fnally, ncreased emsson from another country j or an ncrease ofα, descrbed by de j > 0, reduces emsson n country as long prvate consumpton and envronmental qualty are substtutes. To see ths, dfferentate effcent emsson wth respect to emsson from country E j, 22

24 de * dc * = N ( P' + A ') de de j j dc * 0 f 0 de j snce the expresson n the parenthess s postve by assumpton. As long as prvate dc * consumpton and envronmental qualty s substtutes then < 0. de j 23

25 Table 1 The Sopha agreement Date of sgnature Ratfcaton % of 1987 emssons a Austra Bulgara Czech Republc n.a. Slovaka Denmark Fnland France Germany Hungary Ireland Italy c Luxembourg b Netherlands Norway Russa Span d Sweden Swtzerland Unted Kngdom Belgum Greece b Poland Iceland 125 c Portugal b,c Romana 55 e Turkey f Notes: a Average NOX emssons as % of 1987 b Reference year 1985 c Average emssons d 1993 emssons e 1994 emssons f 1995 emssons

26 Table 2 Descrptve statstcs, before and after the Sopha protocol was sgned All countres Sgnng countres Non-sgnng countres Before After Before After Before After Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Full sample Nox emssons Nox em. pr. cap Nox em./gdp Observatons Estmatng sample Nox emssons Nox em. pr. cap Nox em./gdp Nox mport Nox domestc GDP Populaton Observatons Before: After: Estmatng sample s smaller than full sample due to dfferencng and mssng observatons on Nox mport Emssons n tons

27 Table 3 Regresson results (frst dfferences) OLS IV Coef SE t Coef SE t Coef SE t Sgned treaty Imported NOX Domestc NOX GDP (GDP) Populaton Transton country Constant R-squared Sargan test (p=0.41) Wu-Hausman test (p=0.76) Observatons Dependent varable s log of nox emssons All varables except Sgned treaty and Transton country are n logs IV: Imported NOX (frst dfferenced) nstrumented by mported NOX and exogenous varables n levels, lagged twce

28 Sgnatory Non-sgnatory Mean sgnatory Mean non-sgnatory 150 NOX ndexed (1987=100) Year Fgure 1 NOX emssons for sgnatory and non-sgnatory countres.2 Sgnatory Non-sgnatory 0 DLn(NOX) Year Fgure 2 NOX growth rates , wth medan bands