Nationally and Internationally Optimal Climate Policies

Karl Farmer and Matthias Schelnast
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Matthias Schelnast: University of Graz

Chapter 19 in Growth and International Trade, 2021, pp 457-477 from Springer

Abstract: Abstract This chapter compares nationally optimal (Nash equilibrium) to internationally optimal (Pareto efficient) emission permit levels in a two-country overlapping generations model with national emission permit systems and the environment as a global public good. When each government maximizes its steady-state economic and environmental welfare and one country is a net foreign creditor and the other one a net foreign debtor, it is nationally optimal for the creditor country with sufficiently high environmental preferences to choose a stricter permit level than the debtor country. However, the resulting Nash equilibrium permit levels are not Pareto efficient. Depending on the direction and strength of the countries’ differences in external balances and environmental preferences, Pareto efficiency mandates that their permit levels are either adjusted in opposite directions or reduced both.

Keywords: Nash equilibrium; Climate policy; Reaction function; Pareto efficiency; Environmental preference (search for similar items in EconPapers)
Date: 2021
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Chapter: Nationally and Internationally Optimal Climate Policies (2013)
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DOI: 10.1007/978-3-662-62943-7_19

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