1. Introduction
The process of enlargement of the European Union to the associated Central and
Eastern European Countries (CEEC) was launched in 1998.1 The growing literature on the
economic implications of this process deals mainly with the effects of trade liberalization,
which has been taking place between the EU and the transition countries as agreed in the
Europe Agreements since 1993 along with world trade liberalization following the Uruguay
round of the GATT agreement (Baldwin, Francois and Portes 1997, Keuschnigg and Kohler
1999, Keuschnigg, Keuschnigg and Kohler 2000, and Piazolo 2000). The classical trade
literature points out mainly the static perfect competition welfare gains from liberalized trade,
which stems from the improved allocation of available resources. Relaxing the assumptions of
classical trade models and assuming imperfect competition, the existence of unexploited
economies of scale allow to consider the pro-competitive effects of trade liberalization
(Francois and Roland-Holst 1997), which may lead to even higher welfare improvements.
However, the EU enlargement goes much beyond the abolition of trade barriers. The new
accession countries are assumed to implement the full range of community policies such as
anti-dumping policy, state aid, competition policy and environmental policy. Open questions
still remain concerning the participation of the new member states in the EU common
agriculture policy (CAP) and the operation of the EU structural funds (see Agenda 2000, EC
1997 and Europaische Kommission 2000).
In spite of the geographical vicinity, the state of the environment in the accession
countries differs significantly from the EU. The environmental policy in the EU, which
consists of a series of standards and directives, has been developed during a long period of
time mainly as a response to the fast economic growth. In contrast, the environmental burden
in the new accession countries with lower population density and less intensive land use, but
higher demand for energy per unit of production did not appear to be a real constraint on
production activities until the beginning of the 1990s. Cheap and subsidized energy, no
market pricing and weak budget constraints distorted the efficient allocation of the available
resources and led to overuse and excessive pollution (Klarer and Moldan 1997). The
transition countries have committed themselves to reduce their emissions of greenhouse gases
according to their targets set in the Kyoto Protocol (UNFCCC 1997). Thus they do not only
1 CEECs are the Czech Republic, Hungary, Poland, Estonia, Slovenia, Romania, Bulgaria, Latvia, Lithuania, and
the Slovak Republic. While accession negotiations are presently taking place with the first five countries,
membership of the last five countries will be postponed to some later stage (Europaische Kommission 2000).