On the Strategic Effect of International Permits Trading on Local Pollution

Abstract

We introduce a model of strategic environmental policy where two firms compete à la Cournot in a third market in the presence of multiple pollutants. Two types of pollutants are introduced: a local and a transboundary one. The regulator can only control local pollution as transboundary pollution is regulated internationally. We illustrate that when transboundary pollution is regulated through the use of tradable emission permits instead of non-tradable ones then a new strategic effect appears which has not been identified thus far. In this case, local pollution increases further. We caution that linking permit markets across regions may be welfare detrimental. We also provide evidence from the implementation of EU ETS over the pollution of particulate matters (PM 10 and PM 2.5).

Investment perspectives on costs for air pollution control affect the optimal use of emission control measures

“…It is also identified that the choice between an emission tax and permit instruments on different pollutants in a multi-pollutant system might have welfare impacts, where the key determinant is whether the pollutants are complements or substitutes (Ambec and Coria 2013;Fullerton and Karney 2018). Furthermore, also related to our results, Ambec and Coria (2018) and Antoniou and Kyriakopoulou (2015) show how the best choice of instruments is affected by the geographical dispersion of emissions and the national/international structure of governance. Our results add yet another dimension to this ongoing research on costeffective multi-pollutant environmental policy by showing how also investment perspectives can affect cost-effectiveness of a policy.…”

Strategic Export Motives and Linking Emission Markets

“…where the corresponding terms are similar to the ones analyzed in (5). Notably, here, the right-handsides of ( 7) and the …rst equation in ( 8) coincide.…”

“…Then, given from Lemma 2 and adding the two …rst order conditions in (A5) we obtain dw de + dW dE = dw de + dW de = @e @e + @E @e P e + @ @X @X @e + @ @x @x @e @d @e + @D @e . The latter corresponds to the …rst order condition in (5). Proof of Remark 1.…”

“…However, regulation remains below the e¢ cient level. In a similar setup but in the presence of multiple pollutants Antoniou and Kyriakopoulou (2019) show that when the transboundary pollutant is regulated through a permits market then the incentives to relax further local regulation are magni…ed. Lapan and Sikdar (2020) show that when the exporting …rms compete over prices then the level of regulation is strengthened but still not at the e¢ cient level.…”

“…Production for the Home …rm is denoted by x, and the production cost is normalized to zero. 5 Total revenue is r(x; X), and we assume that the two outputs are substitutes, r X < 0, and that a pollutant, z, associated with production, i.e., z = x, adversely a¤ects residents in the two countries; , the rate of pollution per unit of output produced, is a common positive scalar which is set for simplicity and without a¤ecting our results equal to one.…”