Trade-environment linkages in the resolution of transboundary externalities

We shall argue that many environmental dilemmas such as transboundary pollution problems can be described as Prisoners' Dilemmas (PDs). Taken on their own, these environmental PDs lead to inferior outcomes, and offer no internal incentives for successful resolution. However, when linked to trade (or collective security) agreements, described as Assurance Problems (APs), the gains from successful resolution of the trade or collective security game can be utilised as a side-payment to transform and resolve the environmental PD game. We proceed by first describing the basic incentives of the environmental and trade games, then show how linkage can be used to move nations into preferable situations. An important conclusion is that while linkage is nearly always preferable for those playing an environmental PD, it leads to added risks for players of the trade game, explaining the reluctance of the trade community to engage in such linkage for fear of a 'slippery slope' towards greater protectionism (see Jackson, 1992).