Is There a Race to the Bottom in Environmental Policies? The Effects of NAFTA

We address the question whether NAFTA altered the nature of strategic environmental policymaking across US states. Specifically, we extend previous research that has documented a race to the top between US states in environmental policymaking by examining interstate environmental relationships in the time leading up to and beyond the ratification of NAFTA. By focusing on states which border Mexico or Canada, we test the hypothesis that if NAFTA is contributing to a race to the bottom in terms of environmental quality and protection then states which border the NAFTA neighbors should be less responsive to changes in environmental policies in neighboring US states. For sulfur dioxide emissions, we find some evidence that states bordering Mexico give less weight to their US neighbors, indicating a concern for firm flight to Mexico. However, around the time of the NAFTA negotiations, it appears that this concern declined. For other measures of environmental quality, and for states bordering Canada, no significant effects are detected. * The authors wish to thank Arik Levinson and John List for making different aspects of the data available. This work was carried out with the aid of a grant from the Commission for Environmental Cooperation. Correspondence: Per Fredriksson or Daniel Millimet, Department of Economics, Southern Methodist University, Box 750496, Dallas, TX 75275-0496, USA; Email: pfredrik@mail.smu.edu or millimet@mail.smu.edu; Fax: (214) 768-1821. EXECUTIVE SUMMARY We explore the effect of NAFTA on the determinants of environmental quality and policy in US states by differentiating interior states from those bordering Mexico and Canada. We seek to answer whether US states that border either of these countries act differently than interior states and if their behavior changed during times surrounding the ratification of NAFTA. The idea is to test the existence of strategic interaction among states in the determination of environmental policy, and in particular if this interaction differs in border and interior states. In other words, to what extent do state policymakers maintain an eye on environmental policy in neighboring states? Policymakers in US border states may have a stronger concern with capital flight. If this fear plays a role, environmental policy in US border states should be less responsive to changes in neighboring US states. In addition, if NAFTA increased fears of capital flight, then states along the border should be even less responsive to its US neighbors immediately before and after its ratification. Using three different measures of environmental quality and policy per capita sulfur dioxide emissions, Levinson's (1999) index of relative state compliance costs, and per capita toxic chemical releases we reach three important conclusions. First, all three measures indicate that environmental quality and protection improved for all US states leading up to the ratification of NAFTA and continued to improve beyond ratification for toxic releases as well. Second, we find some evidence that US states along the Mexican and Canadian borders respond differentially to environmental changes in neighboring US states in terms of sulfur dioxide emissions and environmental compliance costs, but not toxic releases. States bordering Mexico are less responsive to changes in neighboring sulfur dioxide levels, while states on the Canadian border are more responsive to changes in neighboring states. In terms of compliance costs, states on either border are less responsive to changes in neighboring US states than interior states. This finding may indicate a fear by border states of capital flight to Canada or Mexico. However, around the time of the NAFTA negotiations, this concern may have actually declined. For toxic releases (the only measure of environmental quality available beyond 1994) there was no change in the determination of pollution levels during the 1990s. Finally, we fail to find any evidence of a change in the manner in which environmental quality and protection was determined around the time of NAFTA's ratification. When this is combined with the fact that our three measures of environmental quality improved during the 1990s, we conclude from this analysis that NAFTA has not had a detrimental impact on the environment in the US.

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