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The Long-Run Eects of Environmental Reform in Op en Economies Larry Karp Jinhua Zhao Department of Agricultural and Resource Economics Department of Economics University of California Iowa State University Berkeley, CA 94720 Ames, IA 50011 Email: karp@are.b Voice: 515-294-5857 Fax: 515-294-0221 Email: jzhao@ Sandeep Sacheti 1 American Express Email: ssache@ February 15, 2002 Running Title: Long-Run Eects of Reform 1 We thank Brian Cop eland (the asso ciate editor) and two anonymous referees for helpful comments. The usual disclaimer applies. Abstract We compare the short-run and long-run eects of environmental reform and harmonization under autarky and free trade. When trade is driven by environmental distortions rather than real relative advantages, harmonization of environmental p olicies, even if achieved by lowering standards in one country, can improve short-run aggregate welfare. With the p ossibility of multiple steady states, harmonization can improve long-run welfare, esp ecially when the environment is fragile. Further, long-run considerations favor upward harmonization even when it is equivalent to downward har- monization in the short run. For a country trapp ed in a low (or bad) steady state, environmental reform may not move it to a high (or go o d) steady state under autarky. However, under trad