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Welfare Ranking of Environmental Policies in the Presence of Capital Mobility and Cross‐Border Pollution

Nikos Tsakiris (), Panos Hatzipanayotou () and Michael Michael

Southern Economic Journal, 2017, vol. 84, issue 1, 317-336

Abstract: We construct a model of two regions with cross‐border pollution, and with inter‐regional (regional capital mobility [RCM]) or international (international capital mobility [ICM]) capital mobility. Each region uses emission taxes, or intra‐regionally, or inter‐regionally tradable emission permits to reduce pollution. We show that the non‐cooperative settings of all three instruments are always inefficient relative to their cooperative settings. When regions are symmetric, then (i) with RCM the non‐cooperative setting of intra‐regionally tradable emissions permits is welfare superior to that of the other two instruments, (ii) with ICM the non‐cooperative settings of intra‐regionally tradable emission permits and of emission taxes are equivalent and superior to that of inter‐regionally tradable emission permits, and (iii) with ICM the three instruments are equivalent only when cross‐border pollution is perfect.

Date: 2017
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Working Paper: Welfare Ranking of Environmental Policies in the Presence of Capital Mobility and Cross-border Pollution (2015) Downloads
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