Abstract: The paper constructs a vertical related industry model in open economy to analyze the impact of stringency of the environmental policy on the development of environmental industry in China. Results show that, there exist the gap of the technology of environmental goods and the environmental policy between China and the developed country，and Chinese government can strengthen the level of environmental policy to seize the higher market share of environmental goods when the technology gap is large; the environmental industry can improve the level of environmental standard,and the developed country can strengthen a higher level of environmental policy compared to the developing countries′ because of the development of the environmental industry. Although it is a burden for a downstream firm if there is a strict environmental policy in China, such policy will support the environmental industry′s development and also reduce the dependence on the foreign environmental good.

Key words: open economy, environmental industry, environmental tax, strategic environmental policies