We consider a non-cooperative symmetric three-stage game played by a pair of regulator-firm hierarchies to capture the scale and technological effects of opening markets to international trade. Each firm produces one good sold on the market. The production process generates pollution characterized by a fixed emission/output ratio, and crosses the borders. Firms can invest in R&D in order to lower their emission ratio, and this activity is characterized by positive R&D spillovers (beta).

We show that R&D spillovers and the competition of firms on the common market help non-cooperating countries to better internalize transboundary pollution.

When the R&D spillover increases,  pollution decreases in most cases, and increases in some others. However, the social welfare improves with beta.

Opening markets to international trade leads to both more investment in R&D and more production, and to a lower emission ratio. In most cases, pollution in common market is lower than in autarky, implying a greater social welfare. Nevertheless, in some other cases, international trade increases pollution and therefore reduces the social welfare.