Title

Carbon leakage: the role of sequential policy setting

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2-2012

Journal or Book Title

Environment and Development Economics

Volume

17

Issue

1

First Page or Article ID Number

91

Last Page

104

DOI

10.1017/S1355770X1100026X

Abstract

We analyze non-cooperative environmental policy when the only strategic interaction between countries is through bilateral transboundary pollution, i.e., countries are closed or small open economies. Under simultaneous moves, there is no carbon leakage. However, in the sequential-move game, carbon leakage occurs; the leader sets its pollution tax lower than that in the simultaneous-move game and lower than the marginal damage from own pollution, while the follower sets its tax higher than that in the simultaneous-move game. The only motive behind the leader's underregulation of own pollution is to reduce the incidence of transboundary pollution from the follower. If pollution is a pure global public bad, aggregate pollution is higher in the sequential-move game than in the simultaneous-move game. The leader (follower) obtains higher (lower) welfare than that under simultaneous moves. Hence, if countries can choose to be leaders or followers, they choose to move first to set environmental taxes.

JEL Classification

H23, Q58

Comments

This is a working paper of an article from Environment and Development Economics 17 (2012): 91, doi: 10.1017/S1355770X1100026X.