Abstract
This paper analyses the political economy of environmental policies in the presence of an eco-industry pressure group. Previous studies deal with two kinds of lobbiests: capitalists and environmentalists. We introduce into the process a third pressure group representing the eco-industry sector. An incumbent government maximizes its chances of being reelected with an objective function that includes both social welfare and political contributions. Introduction of the eco-industry lobby introduces new political contributions and modifies the incentives of the traditional lobbiests.
We suppose an open economy context. In two countries, two polluting sectors are subject to an environmental policy. Therefore, an eco-industry sector that supplies polluting firm abatement goods and services arises. Abatement goods and services are assumed internationally traded, creating the only industrial interaction between the two countries. Pollution affects consumers in both countries and can be transboundary or purely local. Both cases are analyzed.
Our main findings can be summarized as follows. Eco-industries will lobby in favor of more stringent environmental policies unless the impacts of foreign competition more than compensate for the increase in turnover that a tighter environmental policy induces. Polluting firms always lobby against tighter environmental policies.
JEL Classification: F12, H23, Q58
