International emissions trading in a political economy

Abstract

We examine whether the international emissions trading (IET) scheme can reduce global emissions in a political economy framework. Countries act noncooperatively when choosing the tradable emission permits and the environmental tax. The formulation of environmental policies is influenced by interest groups. Our results show that the effect of IET on global emissions depends crucially on which policies are influenced by lobbying activities. In the case where only environmental taxes are influenced by lobbying, IET tends to reduce global emissions when the capitalists’ political power is strong and, surprisingly, when the environmentalists’ political power is weak.

Domestic Pressure and International Climate Cooperation

“…While the direct e ect leads to a policy change in the desired direction in the own country, there is an indirect e ect in the opposite direction on the government of the other country (because of the strategic substitutability of emission permit choices), which may outweigh the direct e ect. Cheng and Chu (2020) also analyze the in uence of lobbying on the performance of an international emission permit market, yet they assume that polluting rms are subject to both an international permit market regime and, in addition, a domestic emission tax. 16 In contrast to Habla and Winkler (2013) they take the formation of an international emission permit market as given and concentrate on the in uence of lobbying on domestic and global emissions.…”