This study examines one of the most important issues on trade and the environment namely, the trade effects of domestic environmental policy. The central question addressed is whether the stringent environmental policies reduce the international competitiveness of environmentally sensitive goods (ESGs) or not. The study is divided in two major parts: the examination of time series evidence to explore the relationship between environmental regulations and trade patterns and the introduction of technology factors, together with endowment factors, to explain the empirical evidence. The time series evidence on the trade effects of environmental policy is provided by using the trade-in-goods approach to investigate the export performance of ESGs in the last two decades. The evidence suggests that the export patterns of ESGs did not undergo systematic change despite the introduction of stringent environmental standards in most developed countries. Least square dummy variable model (LSDV) is used to estimate the panel data of ESGs for both developed and developing countries. We tested the hypothesis that the stringent environmental regulations lower the net exports of ESGs. Our findings reject the hypothesis. The empirical . results show that the estimated effects of factor endowments (capital and labor), technology (R&D) and stringency of environmental regulations on export competitiveness differ-across environmentally sensitive industries. The results of LSDV model complement the findings of trade-in-goods approach and indicate that strict environmental regulations do not influence the export competitiveness of developed countries. But for developing countries, the results are quite i different and we do not reject the hypothesis that an environmental regulation reduces the net exports of ESGs. The stringent environmental regulations have a negative effectvon the net exports of most of the pollution-intensive industries of developing countries. The emphasis of this study is that the trade effects of domestic environmental policy can be – better understood if one allows for a dynamic Ricardian technology factor in the conventional Heckscher-Ohlin framework. Increases in relative labor productivity together with the factor endowments are important factors in determining the relationship between environmental regulations and international competitiveness. Supervisor:- Dr. Rehana Siddiqui