Empirical evidence has so far failed to confirm that lenient environmental regulation attracts investment from polluting firms. In a Cournot duopoly with a foreign firm and a domestic firm, we show that the foreign firm may want to relocate to the domestic country with stricter environmental regulation, when the move raises its rival domestic firm's cost by sufficiently more than its own. The domestic (foreign) country's welfare is (usually) lower with foreign direct investment.

This survey encompasses multiple areas. The theoretical literature on environmental federalism continues to expand in areas such as capital competition and political economy. On the empirical side, emphasis is put on the existence of strategic interaction among states, the effects of President Reagan's decentralization of environmental policy, and possible free-riding behavior. Moreover, the European Union is currently conducting a major policy experiment with its emissions trading scheme, which has implications for policy making in federal systems.

Abstract:We consider an international emissions trading scheme with partial sectoral and regional coverage. Sectoral and regional expansion of the trading scheme is beneficial in aggregate, but not necessarily for individual countries. We simulate international CO 2 emission quota markets using marginal abatement cost functions and the Copenhagen 2020 climate policy targets for selected countries that strategically allocate emissions in a bid to manipulate the quota price. Quota exporters and importers generally have conflicting interests about admitting more countries to the trading coalition, and our results indicate that some countries may lose substantially when the coalition expands in terms of new countries. For a given coalition, expanding sectoral coverage makes most countries better off, but some countries (notably the USA and Russia) may lose out due to loss of strategic advantages. In general, exporters tend to have stronger strategic power than importers.

Emissions trading, Entry and exit, Permit allocation, Cap-and-trade, Rate-based emissions trading, H23, H3, Q48, Q52, Q58,