Sharing R&D investments in breakthrough technologies to control climate change
This paper examines international cooperation on technological development as an alternative to international cooperation on GHG emission reductions. In order to analyze the scope of cooperation, a three-stage technology agreement formation game is solved. First, countries decide whether or not to sign up to the agreement. Then, in the second stage, the signatories (playing together) and the non-signatories (playing individually) select their investment in R&D. In this stage, it is assumed that the signatories not only coordinate their levels of R&D investment but also pool their R&D efforts to fully internalize the spillovers of their investment in innovation. Finally, in the third stage, …
The Strategic Use of Innovation to Influence Environmental Policy: Taxes versus Standards
Abstract This paper evaluates the strategic behavior of a polluting monopolist to influence environmental policy, either with taxes or with standards, comparing two alternative policy games. The first of the games assumes that the regulator commits to an ex-ante level of the policy instrument. The second one is the time-consistent policy game. We find that the strategic behavior of the firm is welfare improving and leads to more environmental innovation than under regulatory commitment if a tax is used to control pollution. However, the contrary occurs if an emission standard is used. Under commitment, it is shown that both policy instruments are equivalent. We conclude that the optimal env…
Can the International Environmental Cooperation Be Bought?
In this paper a two-stage game of international environmental agreement formation with asymmetric countries is solved. The equilibrium of the game allows to determine the number of countries interested in signing the agreement. Two cases are studied. In the first case, it is assumed that the only difference among countries is given by the abatement costs, and in the second case, by the environmental damages. In both cases, two different institutional settings, one without side payments and another with side payments, are considered. The results establish that the asymmetry assumption has no important effects on the scope of cooperation in comparison with the symmetric case if side payments …
Competitive versus efficient extraction of a common property resource: The groundwater case
Abstract In this paper socially optimal and private extraction of a common property aquifer are compared. Open-loop equilibrium and feedback equilibrium in linear strategies have been computed to characterize private extraction. The use of these two equilibrium concepts allows us to distinguish between cost and strategic externalities as long as the open-loop solution captures only the cost externality, and the feedback solution captures both. The results show that strategic behaviour increases the overexploitation of the aquifer compared to the open-loop solution. However, if the groundwater storage capacity is large, the difference between the socially optimal and private extraction, the …
Self-enforcing international environmental agreements with a stock pollutant
In this paper the stability of an International Environmental Agreement (IEA) among N identical countries that emit a pollutant are studied using a two-stage game. In the first stage each country decides noncooperatively whether or not to join an IEA, and in the second stage signatories jointly against nonsignatories determine their emissions in a dynamic setting defined in continuous time. For this second stage we have studied both the open-loop Nash equilibrium and the feedback Nash equilibrium. A numerical simulation shows that a bilateral coalition is the unique self-enforcing IEA independently of the gains coming from cooperation and the kind of strategies played by the agents (open-lo…
La elección del momento oportuno de la política ambiental en un mercado duopolístico
[EN] In this paper the strategic use of innovation by two polluting firms to influence environ-mental policy is evaluated. The analysis is carried out by comparing two alternative policy regimes for two policy instruments: Taxes and standards. The first of the regimes assumes that the regulator commits to an ex-ante level of the policy instrument. In the second one, there is no commitment. The results show that when there is no commitment and a tax is used to control emissions, the strategic behavior of firms can be welfare improving if the efficiency of the clean technology is relatively low. If this is not the case, the strategic behavior of the duopolists has a detrimental effect on welf…
Dynamic Models of International Environmental Agreements: A Differential Game Approach
This article provides a survey of dynamic models of international environmental agreements (IEAs). The focus is on environmental problems that are caused by a stock pollutant as are the cases of the acid rain and climate change. For this reason, the survey only reviews the literature that utilizes dynamic state-space games to analyze the formation of international agreements to control pollution. The survey considers both the cooperative approach and the noncooperative approach. In the case of the latter, the survey distinguishes between the models that assume binding agreements and those that assume the contrary. An evaluation of the state of the art is presented in the conclusions along w…
Can international environmental cooperation be bought?
In this paper a two-stage game of international environmental agreement formation with asymmetric countries is analytically solved. The equilibrium of the game makes it possible to determine the size and composition of a stable agreement. Two cases are studied. In the first case, countries differ only in abatement costs, while in the second case, they differ in environmental damages. In both cases, two different institutional settings, one without transfers and another with transfers, are considered. The results establish that the asymmetry assumption has no important effects on the scope of cooperation in comparison with the symmetric case if transfers are not used or abatement costs repre…
FOREIGN MONOPOLIES AND TARIFF AGREEMENTS UNDER INTEGRATED MARKETS
In this paper the optimal policy and the stability of a tariff agreement among the importers of a monopolized good that is sold in an integrated market are studied. To analyze the stability, the tariff agreement formation is modelled as a two-stage game. In the first stage each importer decides whether or not to sign the agreement and in the second stage the signatories and non-signatories choose their tariff whereas the monopoly chooses the quantity or the price. The findings show that the optimal policy of the importers depends on which strategic variable is selected by the monopolist but that, on the contrary, this decision has no effects on the level of cooperation that can be reached b…
Emission Taxes, Feed-in Subsidies and the Investment in a Clean Technology by a Polluting Monopoly
The paper studies the use of emission taxes and feed-in subsidies for the regulation of a monopoly that can produce the same good with a technology that employs a polluting input and a clean technology. The second-best tax and subsidy are calculated solving a two-stage policy game between the regulator and the monopoly with the regulator acting as the leader of the game. We find that the second-best tax rate is the Pigouvian tax. The tax implements the efficient level of the dirty output but does not affect the total output. On the other hand, the subsidy leads to the monopoly to reduce the dirty output but also to increase the total output. This increase in total output may yield a larger …
Strategic Behavior and Efficiency in the Common Property Extraction of Groundwater
Groundwater has always been regarded as a common property resource where entry is restricted by land ownership and private exploitation is inefficient. In 1980, Gisser and Sanchez presented a first estimation of this inefficiency, cornparing socially optimal exploitation with private (competitive) exploitation using a model with linear water demand, average extraction cost independent of the rate of extraction and linearly decreasing with respect to the water table level. They characterized the private exploitation of the aquifer assuming that farmers are myopic and choose their rate of extraction to maximize their current profits, whereas optimal exploitation is obtained by maximizing the …
On the Coincidence of the Feedback Nash and Stackelberg Equilibria in Economic Applications of Differential Games
In this paper the scope of the applicability of the Stackelberg equilibrium concept in differential games is investigated. Firstly, conditions for obtaining the coincidence between the Stackelberg and Nash equilibria are defined in terms of the instantaneous pay-off function and the state equation of the game. Secondly, it is showed that for a class of differential games with state-interdependence both equilibria are identical independently of the player being the leader of the game. A survey of different economic models shows that this coincidence is going to occur for a good number of economic applications of differential games. This result appears because of the continuous-time setting i…
On Capturing Oil Rents with a National Excise Tax Revisited
In this paper the scope of Bergstrom’s (1982) results is studied. Moreover, his analysis is extended assuming that extraction cost is directly related to accumulated extractions. For the case of a competitive market it is found that the optimal policy is a constant tariff if extraction is costless. However, with depletion effects, the optimal tariff must ultimately be decreasing. For the case of a monopolistic market the results depend crucially on the kind of strategies the importing country governments can play and on whether the monopolist chooses the price or extraction rate. For a price-setting monopolist it is shown that the importing countries cannot use a tariff to capture monopoly …
A note on cooperative versus non-cooperative strategies in international pollution control
Abstract In this note, we evaluate the scope of Dockner and Long’s [Journal of Environment Economics and Management 24 (1993) 13] conclusion on the efficiency of the non-cooperative outcome in a differential game of international pollution control. We also complete the study of the different equilibria the differential game can present. Our results show that their conclusion requires that the initial value of the stock of pollution be higher than the Pareto-efficient pollution stock so that the equilibrium path of emissions involves a decreasing stock of pollution. Our results also show that the application of the procedure proposed by Tsutsui and Mino [Journal of Economic Theory 52 (1990) …
An infinite-horizon model of dynamic membership of international environmental agreements
Abstract Much of the literature on international environmental agreements (IEAs) uses static models, although most important transboundary pollution problems involve stock pollutants. The few papers that study IEAs using models of stock pollutants do not allow for the possibility that membership of the IEA may change endogenously over time. In this paper we analyse a simple infinite-horizon version of the static model of self-enforcing IEAs, in which damage costs increase with the stock of pollution, and countries decide each period whether to join an IEA. Using a quadratic approximation of the value function of the representative country we show that there exists a steady-state stock of po…
Neoclassical Growth, Environment and Technological Change: The Environmental Kuznets Curve
The paper investigates socially optimal patterns of economic growth and environmental quality in a neoclassical growth model with endogenous technological progress. In the model, the environmental quality affects positively not only to utility but also to production. However, cleaner technologies can be used in the economy whether a part of the output is used in environmentally oriented R&D. In this framework, if the initial level of capital is low then the shadow price of a cleaner technology is low relative to the cost of developing it given by the marginal utility of consumption and it is not worth investing in R&D. Thus, there will be a first stage of growth based only on the accumulati…
Second-best taxation for a polluting monopoly with abatement investment
This paper characterizes the optimal tax rule to regulate a polluting monopoly when the firm has the possibility of investing in an abatement technology and the environmental damages are caused by a stock pollutant. The optimal policy is given by the stagewise feedback Stackelberg equilibrium of a dynamic policy game between a regulator and a monopolist. The regulator playing as the leader chooses an emission tax to maximize net social welfare, and the monopolist acting as the follower selects the output and the investment in abatement technology to maximize profits. We find that the optimal tax has two components. The first component is negative and equal to the gap between the marginal re…
Self-Enforcing International Environmental Agreements: Adaptation and Complementarity
This paper studies the impact of adaptation on the stability of an international emission agreement. To address this issue we solve a three-stage coalition formation game where in the first stage countries decide whether or not to sign the agreement. Then, in the second stage, signatories (playing together) and non-signatories (playing individually) select their levels of emissions. Finally, in the third stage, each country decides on its level of adaptation non co-operatively. We solve this game for two models. For both, it is assumed that damages are linear with respect to emissions which guarantee that emissions are strategic complements in the second stage of the game. However, for the …
Sharing R&D investments in cleaner technologies to mitigate climate change
This paper examines international cooperation on technological development as an alternative to international cooperation on GHG emission reductions. It is assumed that when countries cooperate they coordinate their investments so as to minimize the agreement costs of controlling emissions and that they also pool their R&D efforts so as to fully internalize the spillover effects of their investments in R&D. In order to analyze the scope of cooperation, an agreement formation game is solved in three stages. First, countries decide whether or not to sign the agreement. Then, in the second stage, signatories (playing together) and non-signatories (playing individually) select their investment …
An adaptation-mitigation game: does adaptation promote participation in international environmental agreements?
AbstractThis paper studies how the investment in adaptation can influence the participation in an international environmental agreement (IEA) when countries decide in adaptation before they choose emissions. Three types of agreements are studied, a mitigation agreement for which countries coordinate their decisions only on emissions; an adaptation agreement for which there is only coordination when countries decide their levels of adaptation and a complete agreement when there is coordination in both emissions and adaptation levels. In every case, we assume that the degree of effectiveness of adaptation is bounded from above, in order words, adaptation can alleviate the environmental proble…
Sustainable Growth and Environmental Policies
A model of ecologically sustainable endogenous growth is presented, in which environmental quality has a positive influence on individual welfare and on the productivity of capital. The effect of different environmental policies on the long-run growth of the economy is studied in the framework of this model. The results establish that an optimal policy which taxes production and subsidies pollution abatement has a favourable effect on environmental quality, and could increase the growth rate if the positive external effects of the environment on the productivity are important. Furthermore, it is shown that this kind of environmental policy is neutral in budgetary terms, i.e. tax receipts ar…
Optimal growth and land preservation
A model of optimal economic growth with a constant population subject to a constraint on the availability of land is presented. It takes account of the dual character of land as a production factor and as a consumption good (environmental amenities) by determining the optimal intertemporal allocation of land between productive and recreational uses. An extension of the analysis for the case of a growing population with endogenous growth based on human capital accumulation shows that if the rate of discount is not very low then there exists a set of balanced growth paths compatible with a constant allocation of land. En este trabajo se presenta un modelo de crecimiento económico óptimo con u…
On coincidence of feedback and global Stackelberg equilibria in a class of differential games
This paper shows for a class of differential games that the global Stackelberg equilibrium (GSE) coincides with the feedback Stackelberg equilibrium (FSE), although the GSE assumes that the leader/regulator an- nounces at the initial time the regulatory instrument rule she will follow for the rest of the game, while in the FSE, the regulator at any time chooses the optimal level of the regulatory instrument rate. This coincidence is based on the fact that the FSE is calculated using dynamic programming what implies that although the regulator chooses the regulatory instrument rate level that maximizes social welfare, the first-order condition for the maximization of the right-hand side of t…
Adjusting to Climate Change: Implications of Increased Variability and Asymmetric Adjustment Costs for Investment in Water Reserves
Abstract In this paper we study the determination of optimal water storage capacity in a region, taking into account that the supply of the resource, the flow into the reserve, is uncertain, that a measure of the uncertainty, the variance, is likely to increase with climate change, that building capacity is costly, and that the development of water resources may entail alsoenvironmental costs. We find that water storage capacity in the long run ispositivelyrelated to increases in uncertainty if the marginal benefit of water withdrawal isconvexand that, for the case of costly reversibility of investment, a range of inaction for investment appears, and the stability of water storage capacity …
Self-enforcing international environmental agreements revisited
In Barrett's (1994) paper on transboundary pollution abatement is shown that if the signatories of an international environmental agreement act in a Stackelberg fashion, then, depending on parameter values, a self-enforcing IEA can have any number of signatories between two and the grand coalition. Barrett obtains this result using numerical simulations and also ignoring the fact that emissions must be non-negative. Recent attempts to use analytical approaches and to explicitly recognize the non-negativity constraints have suggested that the number of signatories of a stable IEA may be very small. The way such papers have dealt with non-negativity constraints is to restrict parameter values…
- STRATEGIC PIGOUVIAN TAXATION, STOCK EXTERNALITIES AND POLLUTING NON-RENEWABLE RESOURCES
This paper extends Wirl and Dockner¿s (1995) model designed to analyze the long-term bilateral interdependence between a resource exporting cartel and a coalition of resource importing country governments. Firstly, depletion effects are introduced into the analysis of the intertemporal properties of a pigouvian tax. Secondly, the feedback Stackelberg equilibria are computed. The results show that the dynamics of the tax depends critically on the level of the marginal environmental damage. Moreover, they also show that the tax defined by the Markov-perfect Nash equilibrium is a neutral pigouvian tax in the sense that it only corrects the market inefficiency caused by the stock externality. H…
On Capturing Rent from a Non-Renewable Resource International Monopoly: A Dynamic Game Approach
In this paper we model the case of an international non-renewable resource monopolist as a dynamic game between a monopolist and n importing countries governments, and we investigate whether a tariff on resource imports can be advantageous for the consumers of the importing countries when the monopolist sets the price and the importing countries governments act in a non-cooperative way. We find that a tariff is advantageous for the consumers even when there is not commitment to the trade policy although the part of the rent that can be reaped by the importing countries decreases substantially with the number of importing countries. The optimality of the tariff in our dynamic game is explain…
Adjustment costs, uncertainty, and the theory of investment: the case of non-renewable natural resources
Abstract This paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource-extracting industry that faces convex costs of adjustment. The results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear, whereas the effect will be ambiguous if the function is convex.