This paper develops a positive theory of cooperative environmental policy in free trade areas under two different arrangements: (i) harmonized environmental agreement; and (ii) non-harmonized environmental agreement. Each government is influenced by domestic environmental, worker, and capital owner lobby groups, pollution is transboundary, and capital exhibits various degrees of mobility. We find that international harmonization agreements are efficient only if the countries are identical. Non-harmonized agreements give flexibility to take local conditions into consideration, i.e., they are likely to be more efficient. Both equilibrium output levels, the degree of democracy, and the cominon level of trade protection in the member countries have strong impacts on the negotiated agreement. The policy outcomes in sectors with mobile and immobile capital are equivalent because capital competition and lobbying by capital owners have equivalent effects. Finally, a simulation illustrates the theoretical results.