How does the design of international environmental agreements affect investment in environmentally-friendly technology?

Basak Bayramoglu

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Abstract: In this paper, we investigate how the design of international environmental agreements (IEAs) affects the incentives for the private sector to invest in environmentally-friendly technology. The givens are a transboundary pollution problem involving two asymmetric countries in terms of benefits arising from global abatement. There is a single polluting firm in each country. We account for two types of IEAs: an agreement based on a uniform standard with transfers and an agreement based on differentiated standards without transfers. To carry out this study, we use a two-stage game where the private sector anticipates its irreversible investment given the expected level of abatement standards resulting from future negotiations. Our findings indicate that the implementation of the agreement based on a uniform standard with transfers may be preferable for the two countries, as it creates greater incentives for firms to invest in costly abatement technology. This result arises when this technology's level of the sunk cost of investment is low. If this level is sufficiently high, the implementation of the same agreement is not beneficial to countries, because it takes away the incentive of each firm to invest in new abatement technology. Moreover, this agreement is not able to generate any positive gains for either country through cooperation, thus no country is motivated to cooperate.

Keywords: ADOPTION DE TECHNOLOGIE; ADOPTION DE L'INNOVATION; AGREEMENTS; STANDARDS; TRANSFERS; TECHNOLOGY ADOPTION; IRREVERSIBLE INVESTMENT; BARGAINING; TRANSBOUNDARY POLLUTION (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://hal.science/hal-01172961v1
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Citations: View citations in EconPapers (2)

Published in Journal of Regulatory Economics, 2010, 37 (2), pp.180-195. ⟨10.1007/s11149-009-9108-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01172961

DOI: 10.1007/s11149-009-9108-1

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