This paper analyzes the role of vertical linkages on the international effects of environmental policy. Using a simple general equilibrium model of trade, we find that if countries are mutually dependent on imports to produce exports, domestic environmental policy results in negative leakage. In the absence of cooperation, national policymakers only internalize a fraction of the global benefits of domestic environmental policy. If pollution is sufficiently transboundary a race to the bottom ensues, despite the fact that vertical linkages magnify the ability to export the costs of environmental policy via the terms-of-trade. It is found that whether vertical specialization is good or bad for the environment depends crucially on whether it is rooted in stronger linkages or a reduction in the costs of trade.