Tradable Permits vs Ecological Dumping

In this paper we examine an alternative policy scenario, where governments allow polluting firms to trade permits in a strategic environmental policy model. We demonstrate, among other things, that with no market power in the permits market, governments of the exporting firms do not have an incentive to under-regulate pollution in order to become more competitive. This strategic effect is reversed and leads to a welfare level closer to the cooperative one and strictly higher to that when permits are non-tradable. Allowing for market power in the permits market, the incentive to under-regulate pollution re-appears regardless of whether permits are tradable or not. With tradable permits, however, the incentive to under-regulate pollution is comparatively weaker relative to the case of non-tradable permits. This entails potential benefits for the exporting firms and countries since the prisoners’ dilemma is moderated.


Issue Date:
2010-01
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/59374
Total Pages:
31
JEL Codes:
Q58; F12; F18
Series Statement:
SD
2.2010




 Record created 2017-04-01, last modified 2017-08-25

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